Macro Notes 3.3-3.7

Fiscal Policy

The use of government spending and taxes to influence the economy.

Aggregate Demand (AD)

The total demand for goods and services in an economy, calculated as C + I + G + Xn.

Components of Aggregate Demand

C (Consumer Spending), I (Investment Spending), G (Government Spending), Xn (Net Exports).

How does Household Wealth affect Consumer Spending?

If people feel wealthier, they are more likely to increase spending.

Impact of Personal Taxes on Consumer Spending

Lower personal taxes increase disposable income and encourage more spending.

Real Interest Rates effect on Investment Spending

Higher real interest rates make borrowing more expensive, which can reduce investment.

Government Spending effect on AD

An increase in government spending directly shifts Aggregate Demand to the right.

Effect of National Income Abroad on Net Exports

If other countries' incomes rise, they demand more exports from your country.

Short-Run Aggregate Supply (SRAS)

The total supply of goods and services producers are willing to supply at different price levels in the short run.

What causes SRAS to shift left?

Increase in input prices, such as wages and machinery costs, reduces output.

Role of Productivity in SRAS

Improvements in productivity shift SRAS right, increasing output.

Graphing Fiscal Policy

AD/SRAS graphs illustrate how aggregate demand and supply determine overall output and price level.

CPI (Consumer Price Index)

Measures inflation; a 6% increase indicates inflationary pressure, whereas the target is 2%.

GDP Growth Target

Typically, a growth rate between 2.5% and 6% is ideal, while 1% is considered sluggish.

Unemployment Rate Target

An unemployment rate of 4% or lower is the target, with 7% indicating an underperforming labor market.

Fiscal Policy in Action

Involves assessing the consequences of tax cuts and spending increases on the economy.

Challenge of Reducing the Deficit

Cutting spending or raising taxes can be politically difficult, yet necessary to avoid unsustainable national debt.