macro exam 3 Flashcards
Aggregate Expenditures
GDP=AE=C+I+G+(X-M)
Components measured by spending
MPC
Marginal propensity to consume: fraction of additional income that is spent
change in consumption/income
MPS
The change in saving/income
Determinants of Consumption
- wealth
- expectations about future prices
- household debt
- taxes
Investment and Income
have no relationship (autonomous)
Determinants of Investment
-expectations about future revenues and return on investment
-technology
-operating costs
-capital goods on hand
Net Exports
Depend on income in other countries and exchange rate
Multiplier Effect
when an initial amount of spending causes income to grow by a larger amount
Aggregate Demand Curve
shows output of goods and services demanded at different price levels
Determinants of Aggregate Demand
- consumption
- investment
- gov spending
- net exports
4 major factors of consumer spending (besides income) :
- wealth
- consumer expectations
- debt
- taxes
Long-run Aggregate Supply
-supply curve is vertical
- all variables are adjusted in the long run
- gravitates towards full employment
Determinants of Long-run Aggregate Supply
-available resources
-quality of labor force
-available technology
Shifts of the LRAS curve
- increase in the resources of production
- labor quality is enhanced
- technological improvements
Determinants of Short-run Aggregate Supply
-input prices
- productivity
-taxes and regulations
-market power of firms
-business expectations
-inflationary expectations
Short Run Equilibrium
where aggregate demand and short run aggregate supply curves intersect
Long Run Equilibrium
where aggregate demand and long run aggregate supply curves intersect
Demand-side Fiscal Policy
involves using gov spending, taxes, and transfer payments to change aggregate demand and equilibrium output and price level in the economy
Automatic Stabilizers
Tax revenues and transfer payments automatically adjust to economic fluctuations without action by congress
Discretionary Fiscal Policy
the deliberate manipulation of gov purchases, taxation and transfer payments, by congress
Tools of Discretionary Fiscal Policy
-gov purchases
-taxes
-transfer payments
Simple Spending Multiplier
1/1-MPC (consumption varies, other components constant)
Simple Tax Multiplier
-MPC/1-MPC
Expansionary Fiscal Policy
gov spending^
taxes
transfer payments^
used to close contractionary gap (below full employment)
Contractionary Fiscal Policy
gov spending
taxes^
transfer payments
used to close expansionary gap (above full employment)
Supply Side Policies
- spending on infrastructure, education, and technology
- reducing tax rates
- expanding investment and reducing regulations
Timing Lags
-info lag: data not available
-recognition lag: time to recognize data
-decision lag: debated and signed with congress and president
-implementation lag: takes time to implement new programs
