unemployment and fiscal policy Flashcards
multiplier d
total change in output caused by an initial change in government spending
consumption function (aggregate)
equation that shows how consumption spending in the economy as a whole depends on the other variables (ex multiplier)
investment d
expenditure on newly produced capital goods and buildings, including new housing
consumption d
expenditure on consumer goods including both short-lived goods and services and long-lived goods
marginal propensity to consume d
change in consumption when disposable income changes by one unit
which curve is the marginal propensity to consume the gradient of
the consumption line,
x=current income,
y=aggregate consumption spending
autonomous consumption d
consumption that is independent of income
consumer durables d (long lived goods)
consumer goods with a life expectancy of more than three years such as home furniture, cars, fridges
goods market equilibrium d
point at which output equals the aggregate demand for goods produced in the home economy
talk about the goods market equilibrium diagram
x=output
y=aggregate demand
aggregate demand is upward sloping straight line,
goods market equilibrium is where ad line meets 45 degree line
aggregate demand equation for graph with output=x and ad=y
ad = C0 + C1Y +I,
(C0 is autonomous consumption)
(c0 + I is autonomous demand)
what happens when there is a fall in investment for the output=x ad=y diagram
decrease in investment shifts curve downward,
equilibrium point shifts down to new line and then across to 45 degree line then down again and repeats until at new equilibrium
how do you see the multiplier on the output=x ad=y diagram when there is a fall in investment
see how much output has fallen on the x compared to the initial fall in investment on the y axis
what is the equation for the multiplier
1 / (1-C1),
from aY= C0 + C1Y +I
y=1/(1-C1) * (C0 + I)
autonomous demand d
components of ad that are independent of current income
equation for disposable income
((1-t)Y)
consumption equation
C=c0 + c1(1-t)Y
automatic stabilisers d
characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy
positive and negative feedback d
positive=some initial change sets in motion process that magnifies initial change,
negative=initial change ‘’ ‘’ that dampens the initial change
monetary policy d
central bank actions aimed at influencing economic activity through changing interest rates or the price of financial assets
crowd out d
when economy near full capacity an increase in government spending reduces private sector spending
primary budget deficit d
government deficit excluding interest payments on its debt
how does the government borrow money
by selling bonds to firms and households
what does the sale of government bonds do to the government debt
increases it
inflation _____ the governments debt ratio (debt as a percentage of gdp)
reduces
supply side d
how labour and capital are used to produce goods and services
