exam 2 Flashcards
average propensity to consume (apc)
spending/earning
APC + APS = 1
average propensity to save (aps)
money left after spending/earnings
APC + APS = 1
marginal propensity to consume (MPC)
change in consumption/
change in income
function of income
slope in AE model
marginal propensity to save (MPS)
change in savings/
change in income
investment
investment (multiplier) + income = new income with investment
straight horizontal line as a function on income on AE graph
multiplier equation
1/(1-MPC)
how spending has ripple effects in the economy
Simple AE Model
C + I + G + NX
AE (consumption) as a function of income
AE = Y (equilibrium where C+I = AE =Y)
Consumption curve
C+I
Savings and Investment
(Net Exports, Government spending, and Taxes can be added)
investment as a function of income + savings as a function of income
equilibrium: savings = withdrawals
paradox of thrift
savings is a withdrawal from the economy, this it reduces the economy ie. the economy crashed during covid bc consumption was so reduced
The Wealth Effect
higher price level causes the purchasing power of citizens savings to reduce
Interest Rate Effect
higher price levels make it harder to save, savings fall and interest rates rise, making it harder to take loans and reduces AD
Aggregate Demand curve
C+ I + G + NX = AD Curve
output of goods and services (real GDP) demanded at different price levels
- shifts left or right according to consumer demand
Export Effect
higher price level causes goods to be more expensive, reducing exports and AD
disposable income
income - taxation
equilibrium
savings + taxation = investment + gov spending
Aggregate Supply Curve
shows the real GDP that firms will produce at varying price levels
Long Run Aggregate Supply
slope: vertical since its driven by the natural rate of output
- right shifts occurs when tech and/or labor is improved, and/or trade and globalization increase
-prices are fully flexible
Short Run Aggregate Supply
- prices not fully flexible, incentive to produce is reduced if inputs (materials needed to produce) catch up to outputs ($ made)
lags
time it takes for an economic issue to be recognized and addressed, before which it may correct itself
informational lag
Most data that policymakers need are not available until at least one quarter after the fact
recognition lag
It takes time to recognize trends in the data
decision lag
Policies must be debated and passed in Congress and signed by the president
implementation lag
Once a policy becomes law, it takes time to plan,
budget, and implement the new program
crowding out effect
Gov. spends money, increasing gov. debt, increasing interest rates and making loans inaccessible
deficit
difference between gov. spending and revenue per period
tax revenue < spending
surplus
revenue > spending
debt
aggregate measure of deficit/surplus over time
intra-government debt
debt financed within government agency
public debt
non intra-gov debt
financed by treasury bonds (with interest)
Balanced Budget Rule
budget with no deficit
Cyclically Balanced Budget
deficits are offset by surplus during market boom
Functional Finance Strategy
promotes economic growth and allow for tax increases
Keynesian Economics
economic theory formed after the Great Depression with new understanding that prices and wages are slow to adjust and the need for government intervention in the economy
automatic stabilizers
TAX REVENUES AND TRANSFER
PAYMENTS AUTOMATICALLY ADJUST
TO ECONOMIC FLUCTUATIONS
WITHOUT ACTION BY CONGRESS
supply side fiscal policy
targets the supply
side to promote growth, reduce unemployment, and stabilize prices.
It is designed to shift the long-run aggregate supply curve to the right.
It does not always require a tradeoff between price levels and output.
It requires more time to work than demand-side policy.
ex: Spending on infrastructure,
education, and technology
Reducing tax rates
Expanding investment and reducing
regulations
discretionary spending
spending that works through the appropriations process each year, not fixed
national defense, transportation, education, science, environmental protection
mandatory spending
spending required by law, can only be changed by changing the law
social security, medicare, interest on national debt
expansionary fiscal policy
reduction in taxes or increased spending to increase aggregate demand and output
contractionary fiscal policy
increased taxes or decreased spending to reduce inflation
stagflation (AS negative shock
AS shift left
increased unemployment
increased price levels
decreased output
decreased wages
self correcting -> decreased wages decrease price levels
AS positive shock
AS curve shifts right
increased supply + decreased price level = increased output
causes inflation
recession (AD negative shock)
AD curve shift left
corrected by SRAS shift right
- lower price level increases production or AD is increased through reduced taxes or gov spending
economic boom (AD positive shock
AD curve shift right
demand-pull inflation
high demand increases price levels, pushes economy past full employment levels
cost-push inflation
negative supply shock reduces output and raises prices
government budget constraint
G – T = ΔB + ΔM + ΔA
B = change in bonds held by the public
US National Debt
~35 trillion, 130% of GDP
~28 trillion in public debt, 95% of GDP
social security
working individuals are taxed on their income, which is then saved into a fund that makes social security payments for elderly people. the earliest someone can begin receiving payment is 62
types of taxes
payroll, corporate, individual income, goods
