Unit 4 Exam Flashcards
What explains shifts in SRAS?
Productivity/Technology Input costs "supply shocks" Future Expectations about Prices Government Policies (regulation, business taxes, subsidies)
AD Changes
Changes in Consumption
Changes in disposable income Credit conditions Expectations regarding future prices Value of assets (portfolio) Tax policy
CF =
a + (MPC)Yd
Changes in Investment Spending
Prices of capital goods In technology Planned inventories Outlook about economy Business taxes/subsidies Existing stock of capital goods
real interest rate =
nominal interest rate - rate of inflation
Leakages
Savings
Taxes
Imports
Injections
Investment Transfer Payments Subsidies Govt Spending Exports
APC =
C / Yd
APS =
S / Yd
(APC + APS) =
1
MPC =
change in consumption divided by change in disposable income
MPS =
change in spending divided by change in disposable income
Realistic MPC of U.S. economy
0.96
Simple Spend Multiplier
1 / (1-MPC)
What explains LRAS
change in land/labor/capital(stock)/entrepreneurship/technology
Investment in AS/AD
In the short run, I is considered part of AD
In the long run, I is considered parto f AS
3 Factors in the SLOPE of AD
Real Balances Effect
Interest Rate Effect
Foreign Purchases Effect
Classical Economists think AS shifts because…
Productivity (L,L,C,E), cost of inputs (supply shocks), exp. about inflation
Keynesian
Belief in active government
Suspicion of market outcomes
Public spending and taxation have a crucial role in managing demand
Economy can be stable when not at employment
Keynesian Stabilization Policy
Suggests active role for governments and central banks to manage AD
Artificially influencing AD to get economy close to full employment is known as STABILIZATION POLICY
Two complementary varieties of Stabilization Policy:
Fiscal Policy
Monetary Policy
Fiscal Policy
using the powers of the budget by government to influence C behavior (disposable income)
Monetary Policy
A central bank’s ability to influence the size of the money supply in order to artificially stimulate investment spending (real interest rates)
Economic Schools of Thought
Economic splits into classical, Keynesian, and supply-side. Keynesian splits into monetary and fiscal policy. Classical economy splits into neo-classical, rational expectations, and monetarists.
