AP Macro Fiscal Policy & Graphs
What is the government spending multiplier formula?
1/1-MPC
According to Keynes, if government spending and taxes both increased by the same amount, what will happen to AD
AD shift to the right
If Japan is in a recession and they are a major exporter to the U.S., then which curve will shift in which direction?
AD to the left, net exports decrease
An increase in the cost of production will shift which curve in which direction?
AS shifts to the left
If the cost of production increases, which curve shifts and in which direction?
AS shifts to the left
Which curves shift which direction to cause STAGFLATION (high unemployment, high inflation)
AS shifts to the left
If wages decreases which curve will shift and in which direction?
AS shifts to the right, cost of production goes down
What should increase in order to increase aggregate demand?
government spending
Name one reason why the AS curve will shift to the left
higher output costs, decrease in labor productivity, more government regulation
Name one reason why fiscal policy is hard to implement
increase in deficit spending, time lags, crowding out effect, difficulty in predicting future
What leads directly to the crowding out effect?
increase in government spending
If there is a decrease in energy prices, what will happen to output and price level?
increase in output, lower price level
If an economy has a horizontal supply curve and there is an increase in government spending, what will happen to output and price level?
increase in output, no change in price level
The long-run aggregate supply curve will shift for what reasons?
increase in resources and increase in technology
BONUS: What will an unexpected decrease in aggregate demand do to business' inventories when the economy is in equilibrium (full employment)
increase inventories
What is the purpose of expansionary fiscal policy?
increase output, lower unemployment
What will an increase in government spending do to output, unemployment, and price level?
increase output, lower unemployment, increase price level
What will an increase in government spending to do output, unemployment, and price level?
increase output, lower unemployment, increase price level
How does the U.S. government finance deficit spending?
issuing new bonds
What will happen to GDP if investment spending decreases?
GDP decrease bc AD shifts to the left
What will happen to GDP if there is a discovery of vast new oil deposits?
GDP increase bc AS shifts to the right
What is the tax multiplier?
MPC/1-MPC
What will happen to price level, output, and unemployment if exports increase?
PL & output increase, unemployment decrease
BONUS: What is it called when revenues exceed expenditures?
budget surplus
Name four reasons why the AD curve can shift
change in C, I, G, and NX spending
How do you calculate MPC?
change in consumption / change in disposable income
What is an example of expansionary fiscal policy?
cut taxes, increase government spending
What can lead to the multiplier decreasing?
decrease in consumption or increase in savings
What is the crowding out effect?
decrease in consumption/investment spending due to increase in government spending
Name one thing that will result in lower inflation (price level) and lower unemployment (shifts AS curve to the right)
decrease input costs, increase labor productivity, increase technology, deregulation
Keynesian economics is also called __________-side economics
demand-side
Name one reason why the AS curve would shift to the right
lower output costs, increase in technology/labor productivity, deregulation
(- extra -) MPC stands for?
marginal propensity to consume
The intersection between AS and AD measures what (think what X & Y-axis are labeled as)
measures total output/real GDP and price level
If the AD curve shifts, will the short-run Phillips curve shift or will there be a movement along the curve?
movement
Why is increased government spending an effective tool for increasing aggregate demand?
multiplier effect
If the MPC increased, what will happen to the multiplier?
multiplier increases
If an economy has a horizontal supply curve and there is an increase in government spending, what will happen to output and price level?
no change in PL, output increase
MPC plus MPS always equals what?
one
The LRAS curve will shift the same way and for the same reasons as which other curve we previously studied?
production possibilities curve
Give an example of contractionary fiscal policy
raise taxes or cut government spending
If the economy is producing below full employment, what type of gap do you have?
recessionary gap
BONUS: What is an example of a leakage from the circular flow diagram?
savings, taxes
If the AS curve shifts, will the short-run Phillips curve shift or will there be a movement along the curve?
shift
If the AS curve shifts to the right, the short-run Phillips curve will do what?
shift to the left
If the AS curve shifts to the left, the short-run Phillips curve will do what?
shift to the right
What is an automatic stabilizer?
something that changes that does not require passage of new legislation; already built in
Keynes believed that prices and wages where which one: sticky or flexible?
sticky - slow in changing
What is the main theory of classical economists?
the economy will self-regulate
What is one example of an automatic stabilizer?
transfer payments, food stamps, unemployment compensation, progressive tax system
The Phillips curve shows a trade-off between what two things?
unemployment and inflation
If the economy is in a recession and NO POLICY ACTION is taken, what will happen?
wages will decrease, shifting the AS to the right and return back to full employment
What is a discretionary fiscal policy?
when Congress/President passes new legislation to influence the economy
What is a federal budget deficit?
when spending exceeds revenues