Exam 3 Flashcards
In the short run, how will wages and resources respond to a price increase
They will not increase as price levels increase
In the long run, how will wages and resources respond to a price increase
They will increase as price levels increase
Shifters of AD
Consumer spendingInvestment spendingGovernment spendingNet Exports
Shifters of AS
Inflationary expectationsResource pricesGovernment actions (taxes, subsidies, regulations)Productivity
Discretionary fiscal policy
Congress creates a new bill that is designed to change AD through government spending or taxation
Non-Discretionary fiscal polict
Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy
Expansionary fiscal policy
Laws to increase output
Expansionary fiscal policy examples
Increase government spending and decrease taxes (increases disposable income)
Contractionary fiscal policy
Laws to reduce inflation
Contractionary fiscal policy examples
Decrease government spending and increase taxes (decreases disposable income)
Deficit spending
If the government increases spending without increasing taxes they will increase the annual deficit and national debt
Time lags
Congress takes time to write, debate, pass, and implement legislation
Crowding out
Government spending might cause unintended effects that weaken the impact of the policy. Ex: deficit spending to increase AD would increase interest rates and decrease investment
Three functions of money
A medium of exchangeA unit of accountA store of value
A medium of exchange
Money can easily be used to buy goods and services with no complications of a barter system
A unit of account
Money measures the value of all goods and services. Money acts as a measurement of value
A store of value
Money allows you to store purchasing power for the future
Commodity money
Something that performs the function of money and has alternative uses (cigarettes in prison)
Fiat money
Something that serves as money but has no other important uses ($20 bill)
Shifters of money demand (Dm)
Changes in price levelChanges in incomeChanges in taxation that affects personal investment
Changes in price level
Inflation requires the consumer to hold more cash for financial transactions
Changes in income
Sustained economic growth in the economy leads to more employment and increase in the demand for money
Changes in taxation that affects personal investment
Government policies such as changing the capital gains tax would change the demand for money
Shifters of the money supply
Change in reserve ratioChange in the discount rateChange in the discount rate
Change in reserve ratio
To increase the money supply, decrease the reserve ratioTo decrease the money supply, increase the reserve ratio
Change in the discount rate
To increase the money supply, decrease the discount rateTo decrease the money supply, increase the discount rate
Change in the discount rate
To increase the money supply, the FED buys bondsTo increase the money supply, the FED sells bonds
Federal Funds Rate
The interest rate that banks charge one another for one-day loans of reserves
Supply shock
An event that affects aggregate supply
Drought, hurricane, oil shock
Stagflation
persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
Caused by a negative supply shock
Autonomous Consumption
the minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities.
Classical Economic Theory
Hands off; let the market decide
Keynesian economic theory
Govt involvement (inc/dec taxes, etc)
Spending multiplier equation
1/1-mpc or 1/mps
If LRAS shifts, what else shifts
LRPC
If AS shifts right…
Shift the SRPC to the left
If AD shifts…
Move along the SRPC
