Business Economics Chapter 15

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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


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