Unit 3 Flashcards
(32 cards)
Why is the AD Curve downward sloping?
Wealth Effect-Interest Rate Effect-Exchange Rate Effect WIE
Define the Wealth Effect
Higher price levels reduce the purchasing power of money. This decreases the quantity of expenditures.
Define the Interest Rate Effect
When the PL increases, lenders need to charge higher interest rates to get a real return on their loans; higher interest rates discourage consumer spending and business investment.
Define the Exchange Rate Effect
When U.S PL rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods.
What are the shifters of AD?
C/Ig/G/Xn
Define the Marginal Propensity to Save (MPS)
How much people save rather than consume when there is a change in disposable income; MPS= Change in Savings/ Change in DI
Define the Marginal Propensity to Consume (MPC)
How much people consume rather than save when there is a change in disposable income; MPC= Change in Consumption/ Change in DI
What is the equation for the Spending Multiplier (SM)?
1/MPS
What is the equation for the Simple Tax Multiplier (TM)?
MPC/MPS
What are the shifters of SRAS?
Change in the Price of Resources-Changes in Taxes/Subsidies/Regulations- Change in Productivity-Expectations of Inflation S-PTPI
How will SRAS shift if there is an expectation of an increase in Inflation?
Left
Define Negative Supply Shock
When you run out of a key resource; SRAS shifted to the left.
What happens when everything else is at equilibrium but SRAS is shifted to the left?
Stagflation
Define Positive Supply Shock
You have more of a key resource; the SRAS would be shifted to the right.
Define Expansionary Fiscal Policy
Laws that reduce unemployment and increase GDP; increase in government spending and decrease in taxes (combination of 2)
Define Contractionary Fiscal Policy
Laws that reduce inflation, decrease GDP; decrease in government spending and increase in taxes (combination of 2)
Define Discretionary Fiscal Policy
Congress creates a new bill that is designed to change AD through government spending or taxation; one problem is lag time due to the bureaucracy.
Define Non-Discretionary Fiscal Policy
(Also called Automatic Stabilizers); permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy. When GDP goes down, government spending automatically increases and taxes automatically fall.
Define Aggregate Demand
Real GDP desired at each price level.
Define Aggregate Supply
Total real output produced at each price level; relationship depends on time horizon.
Define Average Propensity to Consume (APC)
fraction of total income consumed (APC=Consumption/Income)
Define Average Propensity to Save (APS)
fraction of total income saved. (Savings/Income)
The sum of propensities to save and consume ALWAYS equal to _____.
1
There is an _____ relationship between income and Average Propensity to Consume.
Inverse
