question
What is the formula for C in the GDP Formula
answer
How much people consume when they have 0 0 disposable income + Disposable income( gross income - taxes) X MPC
question
What is the MPC (Marginal Propensity to Consume)?
answer
The MPC described how much of each EXTRA dollar a consumer will spend on consumption. When the MPC is .6 this means that if you were to make an extra $1,000 you would spend $600 and save $400.
question
How is MPC calculated?
answer
change in consumption/change in disposable income
question
What is MPS? (Marginal Propensity to Save)
answer
How much of each EXTRA dollar you save!
The formula to find the MPS is 1-MPC.
The formula to find the MPS is 1-MPC.
question
What does MPC + MPS equal?
answer
1
question
What is the multiplier effect?
answer
New GDP created by MPC going around the circular flow model
question
How do you calculate the spending multiplier?
answer
1/MPS or 1/1-MPC
question
What are some common multipliers?
answer
MPC: 0.90 = 1/0.10 = 10
MPC: 0.80 = 1/0.20 = 5
MPC: 0.75 = 1/0.25 = 4
MPC: 0.50 = 1/0.50 = 2
MPC: 0.80 = 1/0.20 = 5
MPC: 0.75 = 1/0.25 = 4
MPC: 0.50 = 1/0.50 = 2
question
What are the 3 multipliers?
answer
1. Spending Multiplier
2. Tax Multiplier
3. Balance Budget Multiplier
2. Tax Multiplier
3. Balance Budget Multiplier
question
What is the tax multiplier?
answer
Always 1 less than the spending multiplier, caused by transfer payments, and always negative
question
Why is the tax multiplier always 1 less than the spending multiplier?
answer
When the government gives a tax refund or a transfer payment to households, this injection has to go through the peoples consumption savings before it goes back around the circular flow
question
What is the balance budget multiplier?
answer
spending multiplier + tax multiplier
question
What is inventory?
answer
Store of output produced but not sold yet
(unplanned investment)
(unplanned investment)
question
How do you calculate I (investment spending) in the GDP Formula
answer
I = planned + unplanned spending
question
What causes firms to increase capital investment?
answer
1. Interest Rate: decrease interest rate = increase I spending
2. Expectations about future sales and GDP: high future= Increase I spending
3. Current Levels of Production: low demand = increase unplanned inventory, high capacity = low chance to spend I
2. Expectations about future sales and GDP: high future= Increase I spending
3. Current Levels of Production: low demand = increase unplanned inventory, high capacity = low chance to spend I
question
What is aggregate demand?
answer
Total amount of goods and services people want to buy at various price levels
question
What are the 3 ways the AD curve is downsloping?
answer
1. Real Wealth Effect
2. Interest Rate Effect
3. Foreign Trade Effect
2. Interest Rate Effect
3. Foreign Trade Effect
question
What is the real wealth effect?
answer
When price level increases, purchasing power decreases, when real purchasing power decreases people buy less
question
What is the interest rate effect?
answer
Increase demand for loan money which decrease the supply of loanable funds, so banks increase interest rate to get back to equilibrium in money market. This increase interest rate decreases real GDP because households and firms put off major purchases
question
What is the foreign trade effect?
answer
-When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods
-Exports fall and imports rise causing real GDP demanded to fall.
-Exports fall and imports rise causing real GDP demanded to fall.
question
What is a demand shock?
answer
an event that shifts the aggregate demand curve
question
What is a supply shock?
answer
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve. Unexpected changes in aggregate supply
question
What causes shifts in aggregate demand?
answer
A change in any factor that influences spending OTHER THAN price. (consumption and investment spending, population, tastes, expectations and interest rates)
question
How do changes in consumption affect AD?
answer
Consumption increases when there are expectations about future inflation/shortages, when ones wealth or income increases, optimism about jobs and future income, or increased household borrowing. All of this would shift the AD curve to the right
question
How do changes in investment spending affect AD?
answer
If interest rate drops, investment increases, which shifts the AD to the right. If investors have positive expectations about future business conditions, AD will shift to the right.
question
How do changes in government spending affect AD?
answer
If government carries out expansionary policy such as increased spending, increase in the money supply, or a decrease in taxes, this causes an increase in C and I spending which shifts AD to the right.
question
How do changes in net exports affect AD?
answer
If the US dollar depreciates in terms of other currencies, imports decrease because Americans must pay more dollars to buy foreign foods which would increase NX. And if Foreign income increases then exports would increase
question
What is short-run aggregate supply?
answer
the amount of goods and service an economy will produce when prices are fixed in the short run
question
What causes shifts in the SRAS curve?
answer
1. Changes in input/commodity prices
2. Change in nominal wages paid to employees
3. Any change in productivity
4. Change in expectation about inflation
2. Change in nominal wages paid to employees
3. Any change in productivity
4. Change in expectation about inflation
question
What does a typical AD/AS graph look like
answer
Full employment output
question
What does Y = on an aggregate supply/demand graph
answer
the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy
question
What is fiscal policy?
answer
1. Government Spending
2. Taxes
3. Transfer Payments
2. Taxes
3. Transfer Payments
question
What are the three ways of Fiscal Policy?
answer
the amount of goods and service an economy will produce when prices have a chance to adjust
question
What is long run aggregate supply?
answer
Prices and wages that cannot adjust easy and stuck in short run
question
What are sticky prices/wages?
answer
created by john maynard keynes, large scale government spending to stimulate the economy.
question
What is Keynesian economics?
answer
1. Population rises
2. New technology
3. Increased investment
2. New technology
3. Increased investment
question
What three ways could the LRAS shift to the right?
answer
the reason why productivity is difficult due to the time it takes between when a company makes and investment and when the investment is translated into improvement.
question
What are time lags?
answer
government spending and taxes that automatically increase or decrease along with the business cycle
question
What are automatic stabilizers?
answer
US progressive tax system, welfare, food stamps, etc
question
What are some examples of automatic stabilizers?
answer
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