Unit 3 Flashcards
Product Market
The “place” where goods and services produced by businesses are sold to households
The factor market
The place where resources (land, labor, capital and entrepreneurship) are sold to businesses
Private Sector
Part of the economy that is run by individuals and businesses
Public Sector
Part of the economy that is controlled by the government
Factor Payments
Payments for the factors of production (rent, wages, interest and profit)
Transfer Payments
When the govt redistributes income (welfare, social security)
Market
Location or mechanism that allows buyers and sellers to exchange a specific product
Aggregate Demand PL decreases (deflation)
The real GDP demanded increases and vice verca
AD is downward sloping because…
The wealth effect (wealthier when price drops)
Interest rate effect - when the PL increase lenders need to charge higher interest rates. -> less people borrow
Foreign trade effect - when US PL increases and foreign buyers buy less goods and Americans buy more foreign goods (Exports increase and Imports decrease) can work both ways
AD Shifters
1) Change in consumer spending (increased disposable income, expectations, household debt, taxes)
2) Changes in investment spending (real interest rates , taxes on return investment)
3) Changes in government spending ( decreased spending = decreased AD)
4) Changes in Net Exports - value of dollar changes aggravate demand. ( dollar increase = decreased AD)
Fiscal Policy
Increases or decrease in government spending. Controlled by Congress when they increase spending shifts curve right = GDP Increases
Monetary Policy
Controlled by the federal reserve. When they increase the quantity of money and decrease interest rates in increases GDP (vice versa)
Short Run Aggregate Supply
Wages and resource $ as PL increase
STICKY WAGES
Long run Aggregate Supply
Wages and resource $ will increase as PL increase
FLEXIBLE WAGES
Shifters of Aggregate supply
1) Changes in nominal wages
2) changes in commodity prices (change in input prices)
3) Change in productivity/technology
4) change in expectations about inflation
5) government actions NOT SPENDING (taxes on producers, subsidies for domestic producers, government regulation.
Change in nominal wages meaning
If producers expect an increase in $ in the future, workers will demand higher wages and costs will increase
DECREASE SRAS
Why is supply upward sloping?
If price rises workers want to make more.
Recessionary gap (demand)
Inflation falls, unemployment rises
Recessionary gap (supply)
STAGFLATION
inflation is rising
Unemployment is rising
VERY BAD
Inflationary gap (demand)
Ex) 1920s
Inflation is rising
Unemployment falling
Inflationary gap (supply)
Inflation is falling
Unemployment is falling
How recessionary gap fixes itself on AD/AS model…
In the short run AD shifts 1st. Wages that stay the same means companies have to let workers go. Then SRAS moves as wages adjust (decrease). In the long run, the SRAS adjusts back to Yf and fixes itself.
How an inflationary gap fixes itself on AD/AS model…
Short run: investments rise
Long run: wages adjust upwards causes SRAS to decrease and the employment returns back to Yf
MPC
The portion we spend when we earn it
Change in consumption/change in disposable income
MPS
The portion we save
Change in savings/change in disposable income
Multiplier effect
Any increase in spending will result in even larger increase in GDP due to the fact that every $ is spent again multiple times.
1/MPS or 1/1-MPC
Change in GDP or AD
Change in spending x multiplier
Tax multiplier
Govt can use taxes to regulate fiscal policy
Raising taxes: negative
Cut taxes: positive
-MPC/MPS
MPC/MPS
Balanced Budget Multiplier
Always 1
When govt spending increase are matched with equal decrease in taxes
Stabilization Policy
The use of Govt policy to reduce the severity of a recession and rein in inflation
1) fiscal policy
2) monetary policy
Non-Discretionary Fiscal Policy
Govt doesn’t choose it’s already done.
AKA: automatic stabilizers
ex) unemployment, welfare
Discretionary Fiscal Policy
Govt chooses to spend
Contractionary fiscal policy
THE BRAKE
laws that reduce inflation, decrease GDP (close inflationary gap)
Increase taxes, decrease gov spending
Expansionary Fiscal Policy
THE GAS
Laws that reduce unemployment and increase GDP
Increase gov spending decrease taxes
Problems of Govt spending
1) Deficit spending
2) Problens of timing
3) Politically motivated policies
4) Crowding out effect
5) Net export effect
Budget deficit
When the gov expenditures exceeds its revenue
Crowding out effect
When the gov borrows a ton of money.
“Crowds out” consumers and or investors
Govt spending must borrow so it increases AD-> Increase price for money (interest rate) -> interest rates rise so investment falls (decreased AD)
Net export effect
International trade reduces the effectiveness of fiscal policies
Ex) Recessionary gap so gov spends to increase AD -> Increase in PL and interest rates -> US goods more expensive -> foreign countries buy less
Monetary policy
Federal reserve
1) changing reserve requirements
2) changing the discount (interest) rates
3) purchasing and selling bonds
Expansionary Policy
Policy that seeks to expand the money supply to encourage economic growth or combat recession
Monetary policy
Contractionary Policy
Form of economic policy used to fight inflation which involves decreasing the $ supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation.
