Unit 5 Flashcards
What does LRAS represent?
Long Run Aggregate Supply
What are the terms used to describe the different gaps that can occur on the graph
Negative output gap/recessionary gap & positive output gap/inflationary gap
What is a recessionary gap
When it’s producing less than potential
What is an inflationary gap
When it’s producing more than potential
What shifts AD
C + I + G + X-M
What shifts SRAS
Productivity changes, expectations about inflation, resource prices
How do the shifts affect output and price level?
Can increase or decrease
Classicalist theory
The economy will self correct
Keynesian theory
The government needs to intervene and help
Fiscal policy tools to close a negative output gap
Reduce wages & input costs
Fiscal policy tools to close a positive output gap
Increase wages & input costs
Expansionary Fiscal Policy
What you use when there’s a negative gap (decrease taxes & increase spending)
Contractionary Fiscal Policy
What you use when there’s a positive gap (Increase taxes & decrease spending)
What are Automatic Stabilizers
They’re designed to reduce the shifts of AD (e.g. progressive taxes, unemployment & welfare benefits)
During inflation government spending…
Decreases
During a recession government spending…
Increases
During recession taxes…
Decrease
During inflation taxes…
Increase
What’s deficit spending
When the govt. spends more than it receives in tax revenue
What’s debt
The cumulative sum of our annual deficits
Marginal Propensity to Consume is…
The change in consumption per change in income (△consumption/△income)
Marginal Propensity to Save is…
△Saving/△Income
Spending Multiplier Formula
1/1-MPC = 1/MPS
Tax Multiplier Formula
MPC/MPS
As MPC falls the multiplier…
Decreases
Why is tax multiplier less than spending multiplier?
B/c individuals save a portion of the initial tax cut
