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