Business Economics Chapter 15
Supply-side AS
AD curve and two AS curves.
Demand-side AD
AS curve and two AD curves.
What is the multiplier in today's economy?
About 2 (ex - investment spending goes down by $50 million so overall spending declines by $100 million)
John Maynard Keynes
British economist who dominated the thinking of economists from the 30's through 70's. Most important economic philosopher since Adam Smith.
Why is supply-side knowledge limited?
Deregulation was offset by increased federal spending so we don't know if a smaller government sector is more efficient.
Aggregate supply is the same as
GDP
aggregate output-expenditure model
GDP = C + I + G + (X - M)
G
Government
What was the only sector big enough to offset decline in spending by businesses?
Government
GDP
Gross domestic product, total output of the economy.
C
Household/consumer spending
Laffer curve theory
IRS would collect more taxes despite lower tax rates.
I
Investment/business sector
What happens when overall spending drops?
Investors become more cautious and invest less (accelerator).
Legislative lag
It often takes over a year to pass laws relating to spending.
Implementation lag
It takes years for an approved project or tax cut to actually go into affect.
Who backed deregulation?
Jimmy Carter signed a major deregulation act.
What did Keynes conclude was the cause of the Great Depression?
Lack of spending
Aggregate supply curve slopes
Left to right
What are the main ideas of supply-side economics?
Lowe tax rates give people more money to spend and stimulate economic activity.
How would the government encourage spending?
Lowering taxes
Recognition lag
Months might pass before significant data is collected to show GFP has stopped growing.
(X - M)
Net foreign sector. X - exports M - imports
Did the laffer curve ever materialize?
No
What are some problems with demand-side policies?
People's dependency on government.
Price level
Refers to price of everything produced in the economy whereas price refers to one good or service
What kind of effect does the investment sector have?
Ripple effect (multiplier)
Evidence that lowering tax rates will raise revenue is FALSE
Ronald Reagan & Bush both reduced rates and revenue fell both times.
What gave rise to supply-side policies?
Ronald Reagan was a supporter of lower tax rates.
How do supply-siders achieve economic growth?
Stimulating supply-side (Lower tax rates & deregulation)
How do demand-siders achieve economic growth?
Stimulation demand-side. (Increase government spending)
"Tipping point"
The burden of tax needed to finance government expenditures will outweigh the benefits.
What sector was to blame for the declining GDP during the Great Depression?
The business/investment sector's unstable spending
temporary federal deficits
The government will go into debt offsetting the decline in spending, but when the economy stabilizes the government will make back that money.
Do the lags or the recession last longer?
The lags; they usually last 4-5 years and the recession only lasted 18 months.
Macroeconomic equilibrium
When aggregate supply and demand meet
Laffer curve
a hypothetical, or possible, relationship between federal income tax rates and tax revenues
macroeconomic equilibrium
amount of real GDP consistent with a given price level; intersection of aggregate supply and aggregate demand
accelerator
change in investment spending caused by a change in overall spending
multiplier
change in overall spending cause by a change in investment spending
Aggregate demand decreases when
consumer spending decreases (shifts left)
Aggregate demand increases when
consumer spending increases (shifts right)
supply-side policies
economic policies designed to stimulate the economy by removing government regulations and lowering marginal tax rates to increase production
unemployment insurance
government program providing payments to the unemployed; an automatic stabilizer
Keynesian economics
government spending and taxation policies suggested by John Maynard Keynes to stimulate the economy; synonymous with fiscal policies or demand-side economics
aggregate supply curve
hypothetical curve showing different levels of GDP that would be produced at various price levels
aggregate demand curve
hypothetical curve showing different levels of real GDP that would be purchased at various price levels
progressive income tax
losing a job or working fewer hours will put you in a lower tax bracket; therefore paying less
"priming the pump"
only a relatively small amount of government spending was needed to initiate bigger overall spending
unemployment insurance
people who are fired or quit do not qualify
equilibrium price
price when quantity supplied equals quantity demanded; price that clears the market
entitlement programs
program or benefit using established eligibility requirements to provide healthcare, food or income supplements to individuals
automatic stabilizers
programs that automatically provide government benefits during an economic downturn; unemployment, insurance and entitlement programs
Examples of automatic stabilizers
progressive income tax unemployment insurance social security
Why might spending be delayed?
recognition lag legislative lag implementation lag
deregulation
relaxation or removal of government regulations on business activities
Higher taxes and lower transfer payments
shift to the left because all sectors collectively buy less
macroeconomics
the branch of economic theory focused on the economy as a whole and decision making by large units, such as governments and unions
Aggregate supply goes up when
the cost of production declines (shifts right)
Aggregate supply falls when
the cost of production increases (shifts left)
aggregate demand
the total value of all goods and services demanded at different price levels
aggregate supply
the total value of all goods and services that all firms would produce in a specific period of time at various price levels
Aggregate demand is the same as
total demand of all people
fiscal policy
use of government spending and revenue collection meaures to influence the economy
