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Macro Notes 3.3-3.7
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Fiscal Policy
The use of government spending and taxes to influence the economy.
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2
Aggregate Demand (AD)
The total demand for goods and services in an economy, calculated as C + I + G + Xn.
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3
Components of Aggregate Demand
C (Consumer Spending), I (Investment Spending), G (Government Spending), Xn (Net Exports).
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4
How does Household Wealth affect Consumer Spending?
If people feel wealthier, they are more likely to increase spending.
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5
Impact of Personal Taxes on Consumer Spending
Lower personal taxes increase disposable income and encourage more spending.
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6
Real Interest Rates effect on Investment Spending
Higher real interest rates make borrowing more expensive, which can reduce investment.
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7
Government Spending effect on AD
An increase in government spending directly shifts Aggregate Demand to the right.
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8
Effect of National Income Abroad on Net Exports
If other countries' incomes rise, they demand more exports from your country.
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9
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.
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10
What causes SRAS to shift left?
Increase in input prices, such as wages and machinery costs, reduces output.
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11
Role of Productivity in SRAS
Improvements in productivity shift SRAS right, increasing output.
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12
Graphing Fiscal Policy
AD/SRAS graphs illustrate how aggregate demand and supply determine overall output and price level.
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13
CPI (Consumer Price Index)
Measures inflation; a 6% increase indicates inflationary pressure, whereas the target is 2%.
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14
GDP Growth Target
Typically, a growth rate between 2.5% and 6% is ideal, while 1% is considered sluggish.
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15
Unemployment Rate Target
An unemployment rate of 4% or lower is the target, with 7% indicating an underperforming labor market.
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16
Fiscal Policy in Action
Involves assessing the consequences of tax cuts and spending increases on the economy.
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17
Challenge of Reducing the Deficit
Cutting spending or raising taxes can be politically difficult, yet necessary to avoid unsustainable national debt.
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