Econ 111 Exam 2

MPS =

change in saving/change in income

Aggregate Expenditures

consists. of the components of GDP that are measured by spending

Aggregate Demand Determinants

consumer spending, investment, government spending, net exports

When short run equilibrium is below full employment

the spending multiplier magnifies new spending (shifting AD toward long run equilibrium)

National Debt

the total accumulation of past deficits plus surplus

Aggregate demand slopes down due to

the wealth effect, export price effect, interest rate effect

short-run aggregate supply curve

the quantity of real GDP supplied and the price level.

Balanced budget multiplier is equal to

1

MPC + MPS =

1

There are four limitations to the effectiveness of discretionary fiscal policy

1.shrinking area of law-maker discretion 2.estimating potential GDP 3.economic forecasting 4.law-making time lag

Spending multiplier =

1/1-MPC

LRAS

A shift in the long run aggregate supply curve moves the economy to a new long-run equilibrium output

Example of MPC

If you spend $0.75 of each dollar you earn, your MPC is said to be equal to 0.75

The potential level of output

LRAS

mandatory spending

Medicaid, Medicare, Social Security, Income Security Programs

Discretionary spending

Military Spending, Infrastructure/Transportation, Education

0<MPC<1 is true or false

TRUE

If the cost of production increase, there is

a decrease in aggregate supply and the SRAS curve shifts leftward

Recessionary gap

a negative difference between actual GDP and the potential GDP, occurs during recessions

Cost-push inflation

a negative supply shock reduces output and raises price, increasing AD will push output back to full employment but at even higher prices alternatively decreasing AD will reduce inflation but increase unemployment

Demand-pull inflation

a positive demand shock expands the economy beyond full employment output, higher input prices shift SRAS to the left until long-run equilibrium is restored, but at higher price level

automatic stabilizer

a tool of fiscal policy that increases or decreases automatically depending on changes in GDP and personal income

If the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output?

aggregate price level decreases; aggregate output increases

Public debt

amount of money held by other (US/foreign banks, US citizens, foreigners, other countries)

Marginal Propensity to Consume (MPC)

an increase in your consumption for each extra dollar income in your income

Marginal Propensity to Save (MPS)

an increase in your savings for each extra dollar increase in your income

If the economy is at full employment, increases in government spending:

are primarily absorbed by price increases.

MPC =

change in consumption/change in income

crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall.

consumption and investment

AD shift factors

consumption, investment, government spending, net exports/imports

Determinants of Investment

expected profit, interest rates, government regulations, technological change

Spending multiplier is always

greater than tax multiplier

Crowding-out Effect

higher interest rates make consumers and business less likely to borrow for purchases and investment, therefore government debt crowds out consumptions and investments leading to a less productive future economy

Paradox of thrift

if households save more, the multiplier becomes smaller, leading to reduced output and income, which then leads to less saving

Y=AE

income

Aggregate income

income of everyone in the economy

Determinants of Consumption

income, expectations about the future, taxes, wealth, household debt

Expansionary Fiscal Policy

increase in government spending, cutting taxes

Things that shift the SRAS left

increase in input prices (oil and shipping costs), expected/increase inflation, a higher market power, taxes and regulations

Stagflation =

inflation + recession, period of economic recession with rising prices

what occurs to right of LRAS (potential level of output)

inflationary gap

Mandatory spending programs

interest on national debt, Medicare, social security

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called _____ debt.

internally held

potential gdp

is independent of the price level.

Fiscal Policy

is the set of policies undertaken by the government to influence the economy, such as discretionary spending

A higher aggregate price level causes

lower aggregate output

Government spending includes

mandatory spending, discretionary spending, net interest

Discretionary spending

military spending, education, infrastructure/transportation

Inflationary gap

occurs when spending is above the full employment level

if technology increases, then in the long run

output is higher and prices are lower

Things that shift the LRAS

population/labor force, natural resources, technological resources, international trade

what occurs to left of LRAS (potential level of output)

recessionary gap

Contractionary Fiscal Policy

reduction in government spending, raising taxes

If interest rates rise, the burden of a nation's public debt will _____ and it will be _____ difficult to service its debt.

rise, more

Cost-push inflation occurs when:

rising resource costs reduce short-run aggregate supply.

If an economy is in a recession, what would expansionary fiscal policy do?

shift AD to the right

AD shift factors any decrease

shifts left

AD shift factors any increase

shifts right

Everything that shifts the LRAS also

shifts the SRAS, however not other way around

Aggregate demand curve

shows the output of goods and services (real GDP) demanded at different price levels

The "sticky-wage" hypothesis explains the

slope of the short-run aggregate supply curve

Things that shift the SRAS to the right

technological progress

average prosperity to consume (APC)

total consumption in a given period divided by total disposable income

AE= C + I

total spending

autonomous consumption

whatever is at zero

Where does long-run equilibrium occur?

where AD and LRAS intersect

Where does short-run equilibrium occur?

where AD and SRAS intersect