Unit 4 Flashcards
What is the interest rate effect?
Effects experienced in macroeconomic indicators caused by an alteration in the interest rates
What is MPC? How do you calculate it?
An MPC is an increase in consumer spending when disposable income rises by $1
- Marginal Propensity to Consume
MPC = change in consumer spending/change in disposable income
What is MPS? How do you calculate it?
An MPS is an increase in household savings when disposable income rises by $1
- Marginal Propensity to Save
MPS = 1-MPC
What is the spending multiplier? How do you calculate it?
The ratio of the total change in Real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change (AAS)
Change Y = 1/(1-MPC) x Change AAS -> (spending multiplier) Change in Y/Change in AAS = 1/(1-MPC)
- INCLUDE THIS ON CHEAT SHEET
What is a consumption function?
An equation or graph that shows how a household’s consumer spending varies with its current disposable income
What is the AD-AS model used for?
It’s used to analyze economic fluctuations
When is the economy in short-run macroeconomic equilibrium?
When the quantity of agg. output supplied is equal to the quantity demanded
- When the SRAS and AD lines cross
When is the economy in long-run macroeconomic equilibrium?
When the point of short-run macroeconomics equilibrium is on the long-run agg. supply curve
When does a Recessionary Gap happen? How can they be addressed?
When agg. output is BELOW the potential output
- expansionary fiscal policy
- LRAS is to the RIGHT of SRAS and AD intersection
When does an Inflationary Gap happen? How can they be addressed?
When agg. output is ABOVE potential output
- contractionary fiscal policy
- LRAS is to the LEFT of SRAS and AS intersection
What is self-correcting?
When shocks to agg. demand affect agg. output in the short-run, but NOT the long-run
What is Potential Output?
Is the level of Real GDP the economy would produce if all prices, including nom. ages, were fully flexible
What is the Wealth Effect?
A change in consumer spending caused by the altered purchasing power of consumers assets
What is the SRAS? What does it show?
The SRAS is the short-run aggregate supply curve
- a positive relationship between agg. price level and Real GDP
What is the LRAS? What does it show?
The LRAS is the long-run aggregate supply curve.
- the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible
- regardless of price, this is the potential/max
What is the Stabilization Policy?
The use of gov. policy to reduce the severity of recessions & rein in excessively strong expansions (spending money)
- meant to reduce the impact of inflationary and recessionary gaps (NOT eliminate them)
What does Expansionary Fiscal Policy do? How?
Increases agg. demand by:
- increasing gov. purchases of g+s
- cutting taxes
- increasing gov. transfers
What does Contradictory Fiscal Policy do? How?
Decreases agg. demand by:
- reducing gov. purchases of g+s
- increasing taxes
- decreasing gov. transfers
What are the shifters of Agg. Demand (AD)?
SPEW
S: ize of physical capital (stock)
P: olicy
E: xpectations
W: ealth
What are the shifters of Agg. Supply (AS)?
PEAR
P: roductivity
E: xpectations ABOUT INFLATION
A: ctions by the gov.
R: esources prices
What does AD show?
The relationship between overall consumption & price level
What does AS show?
The relationship between economy-wide production & the agg. price level
What is Fiscal Policy?
The use of EITHER gov. spending OR tax policy to stabilize the economy
What is Monetary Policy?
Fed. reserve controls monetary policy
- the $$$ in circulation
