Macro Langs Ch 12 & 13
Tax Multiplier
1-Spending Multiplier Taxes x Tax Multiplier (TM) = Δ In GDP TM is a negative number. When Taxes Are Cut (Negative Income), the Negative TM Multiplied By The Negative Income = Positive Income For The Government. (- X - = +)
What effect would a widespread fear by consumers of an impending economic depression have on aggregate demand or aggregate supply, other things equal?
AD curve left, output down and price level down (assuming no ratchet effect).
What effect would an increase in exports that exceeds an increase in imports (not due to tariffs) have on aggregate demand or aggregate supply, other things equal?
AD curve right (increased net exports); AS curve left (higher input prices)
What effect would a 10 percent across-the-board reduction in personal income tax rates have on aggregate demand or aggregate supply, other things equal?
AD curve right, output and price level up.
What effect would the general expectation of coming rapid inflation have on aggregate demand or aggregate supply, other things equal?
AD curve right, output and price level up.
What effect would a 12 percent increase in nominal wages (with no change in productivity) have on aggregate demand or aggregate supply, other things equal?
AS curve left, output down and price level up.
What effect would a new national tax on producers based on the value-added between the costs of the inputs and the revenue received from their output have on aggregate demand or aggregate supply, other things equal?
AS curve left, output down and price level up.
What effect would a sizable increase in labor productivity (with no change in nominal wages) have on aggregate demand or aggregate supply, other things equal?
AS curve right, output up and price level down.
Foreign Purchase Effect
As the United States' price level rises relative to other countries, Americans will buy more abroad (imports) in preference to their own output. At the same time foreigners, finding American goods and services relatively more expensive, will decrease their buying of American exports. Thus, with increased imports and decreased exports, American net exports decrease and so, therefore, does the quantity demanded of American real output.
Real Balances Effect
As the price level rises, the real value—the purchasing power—of money and other accumulated financial assets (bonds, for instance) will decrease. People will therefore become poorer in real terms and decrease the quantity demanded of real output.
Aggregate Demand
C+I+G+NX Consumption, Personal Investment, Private Government Spending Net Imports/Exports
Change In Price Level (Inflation) Effects AS & AD How?
Causes Movement Along Curve
Change In Quantity Demanded Of Real GDP
Ceteris Paribus Movement Along AD Curve Change In Price Level (Inflation) Causes A Change In Quantity Demanded Of Real GDP P - Purchasing Power Effect I - Interest Rate effect Higher Prices Drive Interest Rates Up E - Export Effect Higher Domestic Prices Reduce Exports As Inflation Increases, Buying Power Decreases, People Buy Less Of Product
Change In Quantity Supplied Of Real GDP
Ceteris Paribus Movement along Aggregate Supply Curve Δ In Price Level (Inflation) Causes A Δ In Quantity Supplied Of Real GDP ISR - Immediate Short Run AS: Input Costs & Output Prices Both Fixed (Horizontal AS Curve) SR - Short Run AS: Input Costs Fixed & Output Prices Flexible (Upward Sloping AS Curve) LR - Long Run AS: Input Costs & Output Prices Both Flexible (Vertical AS Curve)
Fiscal Policy
Change In Government Spending And/Or Taxes By Congress To Achieve: Economic Growth, Full Employment, Price Stability
Monetary Policy
Change In Money Supply To Influence Interest Rates By The Federal Reserve To Achieve Full Employment, Economic Growth, Price Stability
Why Is The AD Downward Sloping?
I Demand P-I-E Purchasing Power Effect Interest Rate Effect Export effect
Change In Aggregate Demand
Drop Ceteris Paribus Shift In The Demand Curve No Change In Price Level Change In Non-price Level Determinants Of AD: C+I+G+NX Right
Change In Aggregate Supply
Drop Ceteris Paribus Shift the AS Curve No Δ In Price Level, Δ In Non-price Level Determinants Of AS R - Resource Prices (Input Costs) R - Regulation (Government Regulations) S - Subsidies (Corporate Welfare) T - Taxes (Sales, Payroll, Corporate, AMT) T - Technology, Productivity, Efficiency, Effectiveness As various Factors Make Production Cheaper, Supply Increases, Moving Curve Right
Fiscal Policy When The Economy Is In Recession
Expansionary Fiscal Policy: Increased Government spending Decreases In Taxes Creates A Budget Deficit
Fiscal Policy When The Economy Is At Or Near Peak, And Has Inflation
Experiencing Demand Pull Inflation Decrease In Government Spending Increase In Taxes Creates Budget Surplus
Short Run Characteristics
Fixed Resource (Input) Prices Flexible Product (Output) Prices Sloping Curve
Long Run Supply Characteristics
Flexible Resource (Input) Prices Flexible Product (Output) Prices Vertical Curve Capital, Labor, And Technology Affect This Supply Curve At Full Employment, The Cost Of Producing More Product Increases, Both Labor And Other Resource Costs, Making It Not Worth Making More Product
Immediate Short Run Aggregate Supply Characteristics
Horizontal Curve Due To Sticky Prices, Wages, and Product Prices Primarily Due To Existing Wage, Resource, And Sales Contracts. WMMMW Fixed Resource (Input) Prices Fixed Product (Output) Prices
Aggregate Demand Curve
Inflation Increases, Real Income Decreases, Reduced Buying Power Inflation Decreases, Real Income Increases, Increased Buying Power Downward Sloping Curve
Δ In Real GDP =
Initial Δ In Spending x SM
Ratchet Effect
Prices, Wages, Production Costs Are Highly Upward Flexible, But Highly Downward Inflexible. Since 1950, Only 2 Years Of Deflation, 1955 & 2009
I Demand P - I - E
Purchasing Power Effect Interest Rate Effect (Higher Prices Drive Interest Rates higher, People Borrow Less, Spend Less) Export Effect (Higher Domestic Prices Reduce Exports. Cost Of Our products In other Countries Is High, Reducing Demand)
Shift In Long Run Aggregate Supply Curve
Shifts of the long-run aggregate supply curve can be brought about by such things as technology or changes in resource quantities. While changes in aggregate supply determinants and resulting shifts of the long-run aggregate supply curve are less dramatic than changes affecting aggregate demand, they DO change. In most cases the changes are slow and steady, for example, the natural growth of the population. From time to time, however, shifts in the long-run aggregate supply curve are more abrupt, such as energy shortages during the 1970s.
"real-balances effect" vs. "wealth effect"
The "real balances effect" refers to the impact of price level on the purchasing power of asset balances. If prices decline, the purchasing power of assets will rise, so spending at each income level should rise because people's assets are more valuable. The reverse outcome would occur at higher price levels. The "real balances effect" is one explanation of the inverse relationship between price level and quantity of expenditures. The "wealth effect" assumes the price level is constant, but a change in consumer wealth causes a shift in consumer spending; the aggregate expenditures curve will shift right. For example, the value of stock market shares may rise and cause people to feel wealthier and spend more. A stock decline can cause a decline in consumer spending.
Menu Costs
The Cost To A Firm Resulting From Changing Its Prices.
What assumptions cause the immediate-short-run aggregate supply curve to be horizontal?
The immediate short-run supply curve is horizontal because of contractual agreements. These contracts for both input and output prices imply that prices do not change along the immediate short-run aggregate supply curve.
Why is the long-run aggregate supply curve vertical?
The long-run aggregate supply curve is vertical (at the full-employment or potential output) because the economy's potential output is determined by the availability and productivity of real resources, not by the price level. The availability and productivity of real resources is reflected in the prices of inputs, and in the long run these input prices (including wages) adjust to match changes in the price level. Firms have no incentive to increase production to take advantage of higher prices if they simultaneously face equally higher resource prices.
Long Run Aggregate Supply Curve, Why Vertical
The long-run aggregate supply curve reflects the lack of a cause-and-effect relation between real production and the price level. As the price level rises, real production remains constant at the full-employment level. As the price level falls, real production remains constant at the full-employment level. Due to flexible prices, the same level of real production is generated at every price level.
Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?
The shape of the short-run supply curve is up sloping. Wages and other input prices adjust more slowly than the price level, leaving room for firms to take advantage of these higher prices (temporarily) by increasing output. Firms face increasing per unit production costs as they increase output, making higher prices necessary to induce them to produce more. To the left of full-employment output the curve is relatively flat because of the large amounts of unused capacity and idle human resources. Under such conditions, per-unit production costs rise slowly because of the relative abundance of available inputs. Additional resources are easily brought into production, as the suppliers of these resources (especially labor) are anxious to employ them and are happy to accept current prices. To the right of full-employment output the curve is relatively steep because most resources are already employed. Those resources that are not yet in production require higher prices to induce them, or generate higher per-unit production costs because they are less productive than currently employed inputs. Firms trying to increase production bid up input prices as they attempt to attract resources away from other firms. Even if the firm succeeds in pulling resources from another firm, the aggregate increase in output is minimal at best, as resources are merely shifted from one productive process to another.
Why Does The Aggregate Demand Curve Slope downwards?
Three Reason: 1. Interest Rate Effect. As Interest rates Decrease, Prices go down 2. Real Balances Effect. As Price Level Increases, Purchasing Power Decreases Causing People To Become Poorer, Decreasing The Quantity Demanded Of Real Output. 3. Foreign Purchase Effect. Prices Rise, Imports Become Cheaper, People Buy More Imports. Our Exports Are More Expensive For Foreigners To Purchase, Decreasing The Quantity Demanded Of American Real Output.
Aggregate Supply Time Horizons
Three Time Horizons: Immediate Short Run Short Run Long Run
WMMMW
W - Price Wars M - Menu Costs M - Employee Morale M - Minimum Wage W - Wage Contracts
Total Shift In Aggregate Demand & Aggregate Supply
Δ Spending Plus Δ In Spending Multiplier
