AGGREGATE DEMAND & SUPPLY Flashcards
Why is the AD downward sloping?
- The Wealth Effect
- Interest-Rate Effect
- Foreign Trade Effect
The Wealth Effect
Higher price levels reduce the purchasing power of money. This decreases the quantity of expenditures.
Interest-Rate Effect
When the price level increases, lenders need to charge higher interest rates to get a REAL retun on their loans. Higher interest rates discourage consumer spending and business investment.
Foreign Trade Effect
When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods.
What is Capital Stock?
Machinery and tools purchased by businesses that increase their output.
Marginal Propensity to Consume (MPC)
How much people consume rather than save when there is a change in income.
MPC = change in consumption/ change in income
Marginal Propensity to Save (MPS)
How much people save rather than consume when there is a change in income.
MPS = change in savings/ change in income
Spending Multiplier Formula
1/ MPS OR 1/ 1-MPC
Total change in GDP Formula
Multiplier x Intitial Change in Spending
Simple Tax Multiplier Formula
MPC x 1/ MPS OR MPC/MPS
Problems with Fiscal Policy
The National Debt is the accumulation of all the budget deficits over time.
-A Budget Deficit is when the government’s expenditure exceeds its revene.
- If the government deficit spends it increases interest rates and crowds out investors and consumers.
National Asset Formation (NAF)
The sum of a country’s investments and Net exports.
Formula = I + NX
