Unit 4 Flashcards

(37 cards)

1
Q
A
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2
Q

Aggregate Demand

A

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

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3
Q

Why is AD downward sloping?

A
  1. Wealth effect (C): Lower price levels increase purchasing power and increase consumption expenditures
  2. Interest Rate effect (I): lower prices decrease interest rates which will increase investment spending by firms and consumption spending by households (and vice versa)
  3. Exchange Rate Effect (Xn): Lower price levels will cause foreign buyers to purchase more U.S. goods so export spending will increase
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4
Q

Short Run Aggregate Supply

A

Shows the quantity of goods and services firms will produce at each price level

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5
Q

Why is SRAS upward sloping?

A

-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

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6
Q

Shifters of AD

A

Changes in C+I+G+(X-N)

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7
Q

Shifters of AS

A

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)

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8
Q

Wages in the Short Run

A

Wages and resource prices are sticky and WILL NOT change when price level changes (short run)

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9
Q

Wages in the Long Run

A

Wages and resource prices are flexible and WILL change when price level changes (long run)

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10
Q

Long Run Aggregate Supply (LRAS)

A

-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

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11
Q

The 3 Locations on the Business Cycle

A
  1. Full Employment Output
  2. Negative Output Gap / Recessionary Gap
  3. Positive Output Gap / Inflationary Gap
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12
Q

Demand-Pull Inflation

A

-“Too many dollars chasing too few goods”
-An increase in demand drives up price level

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13
Q

Stagflation / Cost-Push Inflation

A

-Stagnate Economy + Inflation
-Higher production costs
-Increased prices
-A leftward shift of SRAS drives up price level

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14
Q

Classicalism

A

-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

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15
Q

Keynesianism

A

-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

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16
Q

Fiscal Policy

A

Use of the federal gov tools of spending and taxes

17
Q

Relationship between income taxes and consumer spending

A

Income taxes impact disposable income, and are used for government goods and services to be provided

18
Q

Progressive Taxes

A

As income increases, tax increases

19
Q

Regressive Taxes

A

As income increases, tax decreases

20
Q

Proportional Taxes

A

Tax is the same for all income levels

21
Q

Discretionary Spending

A

Congressional spending that stems from new bills and annual appropriation acts (NEW LAWS)

22
Q

Non-Discretionary Spending

A

Congressional spending that stems from permanent spending or taxation laws (OLD LAWS)

23
Q

When the government is in a budged deficit, it must…

A

borrow the missing funds

24
Q

To eliminate a budget deficit the government can…

A

decrease spending or increase taxes (contractionary fiscal policy)

25
Deficit Spending
When the government spends more than it receives in tax revenue
26
Debt
The cumulative sum of our outstanding debts
27
Limitations of Fiscal Policy
1. Lags -Lag Time: Takes a while to enact change: recognition, legislatie, bureaucratic, and implementation lags 2. Debt
28
Discretionary Fiscal Policy
Active stabilizing policy (include lag), new laws on spending and taxes!
29
Automatic Stabilizers
Stabilizing procedures already set in place that stabilize economy w/o gov changes (no lag) -ex: unemployment insurance, progressive tax code, welfare programs, food stamps
30
Marginal Propensity to Consume
-Average person's inclination to consume in the economy. -MPC = (change in consumption) / (change in disposable income)
31
Marginal Propensity to Save
-MPS = (change in savings) / (change in income)
32
MPS + MPC = 1
Must be true because spending and saving are. proportional; spending + saving = income!
33
Total Impact of Spending Equation
Total Change in GDP = (Initial chagne in spending) x Multiplier
34
Spending Multiplier / Expenditure Multiplier
1 / MPS = 1 / (1 - MPC)
35
Tax Multiplier Formula
-MPC/MPS or -MPC/(1-MPC)
36
What do you notice about the relationship between the spending and tax multipliers?
The tax multiplier is smaller than the spending multiplier because an initial portion of any tax cut is saved.
37
What are the 3 major drivers of U.S. debt?
1. Demographics: Growing older population strains SS, Medicare, and Medicaid 2. Rising Healthcare Costs: Twice the price of same quality healthcare in other advanced nations 3. Inadequate revenues: Imbalance between tax revenue and spending enacted by policymakers