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Flashcards in Economic Adjustment And Fiscal Policy Deck (44):
0

What is the long run aggregate supply curve?

The maximum output possible at a given time

Fixed level of GDP

1

What is the LRAS set by?

Available Land / Labor / Capital
Available Technology
Available Efficiency and Productivity

2

What does not change the LRAS but changes the SRAS

Changes in input costs

3

What occurs when there is a recession or weak economy?
The AD/AS equilibrium point is below potential

Recessionary Gap

4

What occurs with an overheated economy?
The AD/AS equilibrium point is beyond potential

Inflationary gap

5

What will happen with the R Gap and I Gap over time?

Will fix itself

6

What is the key factor for the R Gap and the I Gap

Input prices

7

How are input prices affiliated with the R Gap

Recession will reduce input prices

Businesses respond by "hiring" cheaper inputs

SRAS will shift outward - increasing GDP and decreasing PL

8

How are input prices affiliated with the I Gap

Tight resource markets (L,L,C) will increase input prices

Businesses will employ fewer resources

SRAS will shift inward - VERY PAINFUL ADJUSTMENT!

9

What is the idea of classical economics? What is it based on?

The economy will fix itself
Based on supply driven economy - supply creates income needed to buy output

10

Describe the classical economic idea concerning interest rates

People increase savings during recession

This decreases real rate of interest meaning that businesses will increase investment

11

Describe the flexible wages/prices classical economic idea

Input prices decrease during recession

Businesses love cheap inputs and will increase supply

12

What does classical economics believe the gov should do?

Get out da way!

13

What is the thought of Keynesian economics? What is the central aspect?

Economy will not self adjust

Demand

14

What is the Keynesian idea regarding interest rates

They decrease during a recession, but why would a business borrow for capital during a recession????

15

What is the Keynesian idea when it comes to inflexible wages and prices

People resist lowered wages and so businesses will not increase hiring

"Sticky wages"

16

What does Keynesian economics believe the gov should do?

Stimulate agg demand through

Decreases taxes
Increased transfer payments
Increased gov spending

17

What does Keynesian fiscal policy do?

Adjusts either taxes, gov spending, or trans payments to influence aggregate demand

18

What is the goal of expansionary fiscal policy

To fix the R Gap by increasing agg demand

19

What is the goal of contractionary fiscal policy

Fix the I gap by decreasing agg demand

20

How do you solve an R Gap or I Gap problem

Identify the gap amount
Determine the multiplier from the MPC ; Determine the tax multiplier
Divide the gap amount by the regular multiplier- amount of change in gov spending
Then divide gap amount by tax multiplier- amount change in tax or trans payments

21

What happens to the fiscal policy as the MPC goes down

Fiscal policy increases

22

What must the gov do when using expansionary fiscal policy

Borrow money which means running a budget deficit

23

From where does the gov borrow the money from

Factor market - form of bonds

24

Amount of money the gov spends

Outlay

25

When revenues are greater than outlays

Budget surplus

26

What is reagonomics other known as

Supply side economics

27

What are the main goals of reagonomics

Target tax cuts toward supply side of economy

Increase labor hours of workers

Increase amount of capital investment to increase LRAS

28

What taxes are cut for reagonomics

Personal income tax

Tax on savings account

Corporate income tax

Capital gains tax

29

What is the thought process or reagonomics for cutting personal income tax

To increase a worker's desire to work

30

What is the thought process of reagonomics for cutting tax on savings account

To increase saving rate therefore increasing capital borrowing

31

What is the thought process
Of reagonomics for cutting corporate income tax

More spending on capital gains

32

What is the thought process of reagonomics for cutting capital gains tax

Increase desire to own stocks and invest in the market

33

What is the purpose of reagonomics for cutting the taxes

Trying to shift supply curve outward

34

What group of people does reagonomics seem to benefit

Rich people

35

What were the actual effects of reagonomics

Small effects of tax cuts
Effects stronger on demand side
More uneven distribution of income
HUGE budget deficits

36

What was the impact of reagonomics

Same as Keynesian policy

37

What does contractionary fiscal policy cause when the budget is balanced?

A budget surplus

38

Multiplier when MPC = .9

10

39

Multiplier when MPC = .8

5

40

Multiplier when MPC = .7

4

41

Multiplier when MPC = .66

3.33

42

Multiplier when MPC = .6

2.5

43

Multiplier when MPC = .5

2