Unit 3 Flashcards
Aggregate price level
Measure of the overall level of prices in an economy
Price basket
A hypothetical set of consumer purchases of goods and services
Price index
The cost of purchasing a given Market Basket in a given year
Formula for price index of a market basket
Price of MB in given year/ price of MB in base year
Inflation rate
Price index 2- price index 1/price index 1
Consumer price index (CPI)
Measures the cost of the Market Basket on a typical Urban family
Why inflation isn’t too accurate
When you pay more over time you get more.
People change what they buy based on tastes
Producer price index
Measures the price of goods and services purchased by producers
GDP deflator
100x nominal GDP /real GDP
Causes of inflation
Demand pull, cost push, gov printing money
Aggregate demand curve
Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households
Shifters of aggregate demand
C (consumer spending)
I (investment spending)
G (gov spending)
X (net exports)
The wealth effect
The change in consumer spending caused by the altering purchasing power of consumer assets
Interest rate effect
A change in investment and consumer spending caused by altered interest rates that result from changes in the demand
Changes in expectation
Firm space investment spending on what they will make
Changes in wealth
When the real value of housing rises so does purchasing power
Fiscal policy
Do use of government intervention to stabilize the economy
Low tax means high
Disposable income
High tax means Low
disposable income
Monetary policy
Central banks way of changing the quantity of money or the interest rate to stabilize the economy
Wealth effect modern definition
When people have a higher purchasing power they spend more that’s shifting aggregate demand to the right
Foreign trade effect
When price level rises foreign buyers by fever goods
Aggregate supply curve
Shows the relationship between the aggregate price level and the quantity of aggregate output supplied
Nominal wage
Dollar amount of a wage paid
Sticky wages
Nominal wages are slow to fall in the face of high unemployment and slow to rise in the face of labor shortages
Shifters of agregate supply
P (productivity)
E (expectations)
A (actions of the government)
R (Resources)
Demand shock
An event which shifts the demand curve
Changes in commodity prices
When a resource costs more aggregate supply decreases
Changes in nominal wages
If wages increase aggregate supply decreases, because it is an input for the supplier
Changes in productivity
The worker can make something more efficiently this shifts the supply curve to the right
Expectations of inflation
Inflation if it is expected supply more now and vice a versa
Long run agregate supply curve
Just the relationship between the aggregate price level and the quantity of output supplied that would exist if all prices including nominal wages were fully flexible
Potential output
The level of real GDP a country would produce if all prices were fully flexible
Why will LRAS increase over time
- Increase quantity of resources
- Better quality resources
- Tech progress
Supply shock
Something that shifts the supply
Stagflation
Combination of inflation and falling demand
Recessionary gap
Producing less than the potential output
Inflationary gap
Producing more than potential output.
Output gap
Percent difference between actual aggregate output and potential output
Formula for output gap.
Actual -potential/potential
Self correcting
Shocks to aggregate demand affect aggregate output in the short run but not the long run
Classical macroeconomics
The belief that the economy will fix itself
Keynesian macroeconomics
The government needs to step in and fix the economy
The Phillips curve
Shows the ratio between unemployment and inflation in the economy .
How is a shift in agregate demand shown on a PC
Like a mirror.
Increase in demand is a leftward shift along the curve.
Decrease in demand is a rightward shift along the curve
How is Agregate supply shown on a Phillips curve
Like a mirror.
AS shifts right the SRPC shifts left.
AS shifts left, SRPC shifts right
Debt deflation
The reduction of aggregate demand from an increase in real burden of outstanding debt caused by inflation
Zero bound
Nominal interest rate cannot go below zero
Liquidity trap
A situation in which conventional monetary policy is ineffective because nominal interest rates are up against a zero bound
MPC
The ratio of money spent bs money saved
Consumer spending over disposable income
MPS
The amount of money that is saved by a person
1-MPC
Autonomous spending
Spending on stuff that is necessary to live. Won’t change
What a household would spend with no disposable income
Agregate consumption function
Consumption = agregate spending + mpc(disposable income)
C=A+YD
Spending multiplier
1/MPS
Wealth
What your history gives you
Ie. Debt, extra money, investments, etc.
Interest rates and investment spending
If interest rates increase investment spending will go down
Expected future GDP and investment spending
If GDP is expected to increase then more will be invested
Inventory investment
The value of a change of total inventories held In the economy
Calculate total interest rate
I = unplanned investment + planned investment
Consumer spending
What consumers will spend.
it is equal to the autonomous spending plus the disposable income
Two Types of government spending
- Purchases of goods and services
2. Transfers
Types of government transfers
- social security (guaranteed income to people who have none)
- Medicare (for people over 65)
- Medicade (for low income families)
Social insurance
Government programs intended to protect families from economic hardship
Expansionary fiscal policy
Increases aggregate demand by,
- increase in government purchases
- cutting taxes
- or increase in government transfers
Contractionary fiscal policy
Increases aggregate demand by
- reducing government purchases
- increasing taxes
- or reducing transfers.
Multiplier effect
The money government spends causes chain reactions so the value is more than what they actually spent
Tax multiplier
MPC /MPS
Why is government spending worth more than an equal tax cut.
With the government spending there is the multiplier effect, but with the tax cut people will save a portion and spend a portion
Nondiscretionary fiscal policy
The economy stabilizing itself because of the automatic stabilizers set in place by the government, does not require direct government intervention
Discretionary fiscal policy
When the government directly works and makes the decision to try to fix the economy
Government budget equation
Governments revenue minus government purchases and transfers
Gov debt
The aCumulation of passed a budget deficits minus past budget surpluses
Budget deficit
Government revenue is less than spending in a given year
Fiscal year
Runs from October 1 to September 30 and is labeled from the calendar year from which it ends
Public debt
Government that held by individuals and institutions outside the government
Why is rising debt bad?
- Increases interest rates
2. Today’s debt hurts the futures growth
Crowding out
I’m at impacts have a unintended effects to weaken the impact of the policy
Problems with fiscal policy
Deficit spending, timing, politically motivated policies, crowding out, net export affect
How to grow the economy
Increase physical capital (growth rates of investments)
Increase human capital (educate)
Tech progress
Infostructure
Roads powerline sports information or some under pioneer foundations
high infrastructure is equal to a good economy
