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Unit 3 (how do you measure the economy (aggregate demand (features…
Unit 3
how do you measure the economy
aggregate demand
def
all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels
features
downward slope
reasons
wealth effect
interest rate effect
foreign trade effect
shifters
AD=GDP=C+I+G+X
consumer, business, government spending and net exports
debate
keynesian theory
aggregate supply
def
the amount of goods and services (real GDP) that firms will produce in an economy at different price levels
features
two curves
long-term
features
slope
wage and resource prices will increase as price levels increase
short term
features
slope
shifters
change in price
supply shocks
inflationary expectations
action of goverment
taxes, subsidies, regulations
change in productivity/technology
wages and resource prices will not increase as price levels increase
Philips curve
unemployment
inflation
how do you fix the economy?
toolbox
fiscal policy
def.
actions by congress to stabilize the economy
mechanics
non-discretionary
features
automatic stabilizers
works contra cyclical
examples
welfare
unemployment
min. wage
discretionary
new bill designed to change AD through government spending or taxation
functions
contractive
tools
decrease government spending
increase taxes
expansive
tools
increase government spending
decrease taxes
problems
types
problems of timing
government spending takes time and it can be to late to be effective in boosting the economy out of an recession
debt
budget deficit
the amount that gov expenditures exceede its revenue
national debt
accumulated budget deficits
crowding out
when goverment defivit spend they increases demand for loan-able funds this increases interestrates and discourage investment which inhibit GDP
monetary policy
actions by the federal reserve bank to stabilize the economy
the economy
players
consumers
most important part of the economy
consumer spending
types
autonomous consumption
necessities
food etc
the amount consumer will spend independent of income
disposable income
income after taxes
savings
dissavings (negative savings)
when incomes are less than autonomous spending
concepts
the multiplier effect
types
spending multiplier
marginal propensity to consume (MPC)
marginal propensity to save (MPS)
equation
spending multiplier = 1/MPS
MPC+MPS=1
MPC=change in consumption/ change in income
MPS = Change in savings/ change in income
tax multiplier
equation
MPC/MPS
always 1 less than the spending multiplier
money multiplier
equation
1/reserve requirement
economic growth
triple shift
AD
AS
LRAS