ECON-1113 Exam 3 Review
What is a budget deficit, how does it happen, and how is it different than the national debt?
A budget deficit occurs when a government's expenditures exceed its revenues in a given fiscal year. In other words, the government spends more money than it brings in through taxes and other sources of income. A budget deficit can happen for a variety of reasons, such as increased government spending on programs or services, a decrease in tax revenues due to a recession, or changes in tax policies. The key difference between a budget deficit and the national debt is that a budget deficit refers to a shortfall in a single fiscal year, while the national debt is the total amount of money owed by the government over time. In other words, a budget deficit is a yearly occurrence, while the national debt represents the long-term accumulation of deficits.
What causes the Investment demand curve to shift from the left or the right (changes in interest rates will NOT cause a shift but it will cause a slide along it)?
- Acquisition, maintenance, and operating costs - Business taxes - Technological change - Stock of capital goods on hand - Planned inventory changes Expectations
What are the determinants of aggregate demand and how if they change they would cause aggregate demand to shift?
1. Consumption (C) - Change in consumer spending 2. Investment (I) - Change in real interest rates or expected returns 3. Government Spending (G) - Change in Gov. Spending 4. Net Exports (NX) - Changes in factors such as national incomes abroad and exchange rates
What are the 3 periods of time for aggregate supply and what is fixed or flexible in each one?
1.) Immediate Short-run: BOTH INPUT PRICES and OUTPUT are FIXED 2.) Short run: INPUT PRICES are FIXED, OUTPUT is FLEXIBLE 3.) Long run: BOTH are FLEXIBLE and can vary
What is the crowding out effect?
A rise in interest rates and a resulting decrease in planned investment caused by the federal government's increased borrowing to finance budget deficits and refinance debt.
Graphically how would the graph change if the government issued everyone over the age of 18 a $1,400 stimulus check?
AD would shift to the RIGHT, OUTPUT would go UP, and PRICE LEVELS would RISE.
If personal taxes increase (decrease) what happens to your level of consumption and savings?
As taxes go UP your consumption and savings go DOWN. It also works vis versa.
What are some automatic stabilizers? What do they do?
Built-in features of a government's tax and spending system that help to stabilize the economy during economic fluctuations without requiring any additional action or intervention from policymakers. They work automatically, without the need for explicit changes in government policy, and help to reduce the impact of economic fluctuations on individuals and businesses. - Progressive income taxes: Progressive income taxes automatically decrease during periods of economic downturn as individual incomes decrease. - Social welfare programs: Social welfare programs, such as food stamps and housing assistance, automatically increase during periods of economic downturn as more people become unemployed or experience reduced incomes. - Unemployment insurance: Unemployment insurance provides income support to workers who have lost their jobs due to economic downturns. As more individuals become unemployed, more people qualify for unemployment benefits, which helps to stabilize the economy by providing a safety net for those who have lost their jobs.
Why are prices downward inflexible?
Decreases in aggregate supply: - Fear of price wars - Menu costs - Wage contracts - Efficiency wages - Minimum wage law
Graphically how do we show demand-pull inflation or cost-push inflation?
Demand-pull inflation and cost-push inflation can be shown graphically using the aggregate demand (AD) and aggregate supply (AS) model. Demand-pull inflation: Demand-pull inflation occurs when aggregate demand (AD) increases faster than the economy's capacity to produce goods and services, leading to upward pressure on prices. Graphically, this can be shown as a rightward shift of the AD curve; DEMAND PULL is AD shifting RIGHT. Cost-push inflation: Cost-push inflation occurs when the cost of production increases, leading to upward pressure on prices. This can be caused by a variety of factors, such as an increase in the price of raw materials, an increase in wages, or an increase in taxes. Graphically, this can be shown as a leftward shift of the AS curve; COST PUSH is AS shifting LEFT.
What are some ways that aggregate supply in the short run will shift left or right?
Determinants of aggregate supply are the "other things" besides price level that cause changes or shifts in aggregate supply at each price level. Changes raise or lower per-unit production costs: Input prices, Population, Technology, Government Laws, Natural disasters
How is aggregate demand and aggregate supply possibly effected with changes in the exchange rate (value of the dollar compared to other countries)?
Effects on Aggregate Demand: - A decrease in the exchange rate (i.e., a depreciation of the currency) can make exports cheaper and imports more expensive. This can increase net exports, which is a component of AD, and therefore increase AD. - An increase in the exchange rate (i.e., an appreciation of the currency) can make exports more expensive and imports cheaper. This can reduce net exports and therefore reduce AD. Effects on Aggregate Supply: - A decrease in the exchange rate can make exports cheaper and therefore increase demand for domestically-produced goods and services. This can increase the demand for labor and capital, which can increase AS. - An increase in the exchange rate can make exports more expensive and reduce demand for domestically-produced goods and services. This can reduce the demand for labor and capital and therefore reduce AS.
Discretionary fiscal policy vs. Nondiscretionary fiscal policy and what are examples of each one?
Discretionary fiscal policy refers to the deliberate use of government spending and taxation policies to stabilize the economy. These policies are determined by lawmakers and can be changed as needed based on economic conditions. Examples of discretionary fiscal policy include: - Expansionary fiscal policy: This involves increasing government spending and/or cutting taxes to boost aggregate demand and stimulate economic growth. For example, during a recession, the government may increase spending on infrastructure projects to create jobs and increase demand for goods and services. - Contractionary fiscal policy: This involves decreasing government spending and/or raising taxes to reduce aggregate demand and combat inflation. For example, during a period of high inflation, the government may decrease spending and raise taxes to reduce consumer spending and curb inflationary pressures. Non discretionary fiscal policy refers to automatic stabilizers that are built into the tax and spending system and do not require legislative action to take effect. These policies are designed to stabilize the economy without any deliberate action from policymakers. Examples of nondiscretionary fiscal policy include: - Progressive income taxes: These taxes are designed so that individuals with higher incomes pay a larger percentage of their income in taxes. During an economic downturn, as incomes decrease, individuals pay lower taxes, which helps to stimulate consumer spending and boost the economy. - Unemployment benefits: During an economic downturn, more people may become unemployed, and as a result, more people may qualify for unemployment benefits. This can help to stabilize the economy by providing a safety net for those who have lost their jobs and reducing the overall impact of a recession.
What is the biggest variable that effects your personal spending?
Disposable income
What is dissavings?
Dissaving refers to a situation where an individual or entity spends more money than they earn or have saved, resulting in a negative savings rate or a reduction in savings. In other words, it is the opposite of saving, where money is spent instead of being saved or invested. This can lead to debt accumulation and financial instability in the long run. Dissaving may occur due to various reasons such as unexpected expenses, inadequate income, or excessive spending habits.
How do personal and business taxes effect aggregate demand and aggregate supply?
Effects on Aggregate Demand: - Higher personal income taxes reduce disposable income, which is the amount of money people have to spend on goods and services after paying taxes. This reduces consumption spending, which is a component of AD, and therefore reduces AD. - Higher business taxes reduce firms' profits, which can reduce their investment spending, another component of AD. This reduces AD. Effects on Aggregate Supply: - Higher personal income taxes can reduce the incentive to work and to save, which can reduce the supply of labor and capital, respectively, and therefore reduce AS. - Higher business taxes increase firms' costs, which can reduce their profits and their incentives to invest in new capital or research and development. This can reduce AS in the short run and potentially the long run if firms cannot maintain or increase productivity.
What way does the aggregate demand curve shift with expansionary (contractionary) Fiscal Policy?
Expansionary fiscal policy shifts the aggregate demand curve to the right, indicating an increase in aggregate demand at every price level. This occurs because an increase in government spending and/or a decrease in taxes increases disposable income, which in turn increases consumption spending. This increase in consumption spending leads to an increase in aggregate demand, as well as an increase in investment spending, as businesses respond to the increased demand for their goods and services.
What are the main tools of fiscal policy?
Government spending and taxation
Graphically how do we know/show a recession?
Graphically, a recession can be shown in the aggregate demand (AD) and aggregate supply (AS) model as a leftward shift of the AD curve; when you are LEFT of your long run output on the AS/AD graph.
In regards to the consumption schedule and saving schedule if you start to spend more how does your saving schedule shift? (remember it works vis-versa)
If you start to spend more, your consumption schedule will shift upward, indicating that at each level of disposable income, you are now consuming more. At the same time, your saving schedule will shift downward, indicating that at each level of disposable income, you are now saving less. This shift occurs because as you spend more, you have less money available to save. This means that at each level of disposable income, you are saving a smaller proportion of your income, leading to a downward shift in the saving schedule.
If your disposable income is $500 and consumption is $450 do you have dissavings?
If your disposable income is $500 and your consumption is $450, then your savings would be: Savings = Disposable Income - Consumption Savings = $500 - $450 Savings = $50 Since your savings are positive ($50), this means that you have NOT engaged in dissaving. Rather, you have saved $50 out of your disposable income of $500.
If your disposable income is $500 and consumption is $550 do you have dissavings?
If your disposable income is $500 and your consumption is $550, then your savings would be: Savings = Disposable Income - Consumption Savings = $500 - $550 Savings = -$50 Since your savings are negative (-$50), this means that you have engaged in dissaving. This implies that you have spent $50 more than your disposable income of $500, which would have required you to either borrow money or use savings from a previous period to finance the extra spending.
What does productivity measure and how is it important to the aggregate supply curve?
It measures real output per unit of input Productivity = total output/total input Per-unit production cost = total input cost/total output Productivity is important to the aggregate supply curve because it is a key determinant of the position of the curve. When productivity increases, the short-run aggregate supply curve shifts to the right, indicating that firms can produce more output at a given price level. Similarly, when productivity decreases, the short-run aggregate supply curve shifts to the left, indicating that firms can produce less output at a given price level.
The marginal propensity to consume is calculated how?
MPC = change in consumption / change in income For example, if a household's income increases by $1,000 and their consumption increases by $800, then the MPC is calculated as: MPC = $800 / $1,000 = 0.8 Income = 200, Consumption = 220 New Income = 220, Consumption = 230 (220-230)/(200-220) = 0.5
How do you calculate the money multiplier?
Money Multiplier = 1 / Required Reserve Ratio For example, if the required reserve ratio is 10%, the money multiplier is: Money Multiplier = 1 / 0.1 = 10
What is one major draw back with fiscal policy?
One major drawback of fiscal policy is that it is run by people that need to get elected to keep their jobs.
When you save money you give up _______ money.
SPENDING
What helped John Maynard Keynes come up with the aggregate expenditures model?
The Great Depression of the 1930's
What is the money multiplier?
The money multiplier is the ratio of the change in the money supply to the change in the monetary base (also known as high-powered money). It represents the amount by which the money supply is affected by a change in the monetary base.
What business cycle phases go with each fiscal policy?
The use of fiscal policy can help to influence the business cycle by stimulating or slowing economic growth. EXPANSIONARY fiscal policy is typically used during the CONTRACTION and TROUGH phases of the business cycle, in order to stimulate economic growth and increase aggregate demand. CONTRACTIONARY fiscal policy is typically used during the EXPANSION and PEAK phases of the business cycle, in order to reduce inflationary pressures and decrease aggregate demand.
Holding all else equal, when income goes up what happens to savings and consumption?
They BOTH go UP.
According to the foreign purchase effect, if price levels rise (lower) in the US relative to other countries what happens to net exports (NX)?
This will result in a decrease in net exports (NX), as US goods and services become more expensive relative to foreign goods and services.
Can you graphically given a situation show how the aggregate supply/aggregate demand model would adjust?
This would be like me saying we are going to cut taxes and fiscally if I cut taxes and people have are disposable income they will spend more. As we spend more AD with shift to the RIGHT and we will boost the economy due to more consumer spending.
What are the interest-rate effect, real-balance effect, and Foreign purchases effect?
Three key concepts in economics that describe how changes in various factors can affect the demand for goods and services in an economy w/ an inverse relationship: 1. Interest-rate effect: decline in price level means lower interest rates that can increase levels of certain types of spending; AD shifts LEFT. 2. Real-balance effect: price level falls, the purchasing power of existing financial balances rises; as purchasing power goes up, AD shifts RIGHT. 3. Foreign purchases effect: Domestic Prices down, our good cheaper compared to foreign goods; AD shifts RIGHT.
If given numbers can you find the total amount of economic activity created given an injection of a certain amount?
Total economic activity created = Initial injection of spending x Multiplier The multiplier can be calculated using the following formula: Multiplier = 1 / (1 - MPC x MTR) For example, if the initial injection of spending is $100 and the multiplier is 2, the total amount of economic activity created would be: Total economic activity created = $100 x 2 = $200
Referring to the Aggregate Expenditures Model as we added more parts of GDP to the model it would shift ____ or ____ depending on if the new component was positive or negative.
Up; down