Unit 4 Flashcards
(37 cards)
Aggregate Demand
Show the relationship between the price level and the quantity of goods and services demanded by households, firms, government and the rest of the world
Why is AD downward sloping?
- Wealth effect (C): Lower price levels increase purchasing power and increase consumption expenditures
- Interest Rate effect (I): lower prices decrease interest rates which will increase investment spending by firms and consumption spending by households (and vice versa)
- Exchange Rate Effect (Xn): Lower price levels will cause foreign buyers to purchase more U.S. goods so export spending will increase
Short Run Aggregate Supply
Shows the quantity of goods and services firms will produce at each price level
Why is SRAS upward sloping?
-Sticky Wages - wages and input prices will stay constant in the short run
-If price level increases, wages stay constant, so firms will earn more profit and produce more
Shifters of AD
Changes in C+I+G+(X-N)
Shifters of AS
PEAR!
-Productivity Changes (more productive –> SRAS ^)
-Expectations about Inflation (inflation ^, producers supply less now –> SRAS shifts left)
-Actions by the gov (subsidies, taxes, regulation affect producers’ ability to supply their good)
-Resource Prices (^ resource prices –> SRAS dec)
Wages in the Short Run
Wages and resource prices are sticky and WILL NOT change when price level changes (short run)
Wages in the Long Run
Wages and resource prices are flexible and WILL change when price level changes (long run)
Long Run Aggregate Supply (LRAS)
-Represents the output that could be produced at full-employment (max sustainable capacity)
-A permanent change in the production possibilities of the economy can shift LRAS
-Shifters of LRAS are the same as PPC shifters:
1. Changes in resource quality/quantity
2. Changes in technology
The 3 Locations on the Business Cycle
- Full Employment Output
- Negative Output Gap / Recessionary Gap
- Positive Output Gap / Inflationary Gap
Demand-Pull Inflation
-“Too many dollars chasing too few goods”
-An increase in demand drives up price level
Stagflation / Cost-Push Inflation
-Stagnate Economy + Inflation
-Higher production costs
-Increased prices
-A leftward shift of SRAS drives up price level
Classicalism
-Long run adjustments
-Based on the theory of flexible wages and input prices. This states that wages and input costs will adjust quickly in recessions
-These economists are often called supply siders
-The economy will self-correct in the long run as wages and input costs increase/decrease to adjust to a higher/lower price level
Keynesianism
-Based on the theory of sticky wages and input prices. This states that wages and input costs are very slow to change.
-As a result, Keynesian economists advocate for strong government intervention to boost AD during recessions by increasing spending/reducing taxes
Fiscal Policy
Use of the federal gov tools of spending and taxes
Relationship between income taxes and consumer spending
Income taxes impact disposable income, and are used for government goods and services to be provided
Progressive Taxes
As income increases, tax increases
Regressive Taxes
As income increases, tax decreases
Proportional Taxes
Tax is the same for all income levels
Discretionary Spending
Congressional spending that stems from new bills and annual appropriation acts (NEW LAWS)
Non-Discretionary Spending
Congressional spending that stems from permanent spending or taxation laws (OLD LAWS)
When the government is in a budged deficit, it must…
borrow the missing funds
To eliminate a budget deficit the government can…
decrease spending or increase taxes (contractionary fiscal policy)
