AP Macro Fall Final

What choices do you have with money?

What choices do you have with money?

1. Spend it 2. Save it

What is APC?

average propensity to consume

What is APS?

average propensity to save

What is MPC?

marginal propensity to consume

What is MPS?

marginal propensity to save

How do you correct a recession?

More money

How do you correct a inflation?

Less money

What is the money multiplier?

the amount any change in spending will be magnified in terms of RGDP

What is an inflationary gap?

amount by which RGDP exceeds fully employed RGDP

What is a recessionary gap?

amount by which RGDP fall short of full employed RGDP

What is simple spending multiplier?

(1/MPS) or (1/1-MPC), Change in C,I,G,Nx

What is the tax multiplier?

(-MPC/MPS), Change in taxes

Spending formula

(change in spending)(multiplier)= change in RGDP

Taxes Formula

(change in taxes)(tax multiplier)= change in RGDP

Why is the tax multiplier always less than the spending multiplier?

When money is spent, money is spending, but if taxes are cut. people dont spend all the money

What is investment?

business spending on physical capital (tools), new homes, and inventories (products)

How do businesses invest?

they borrow money, higher interest rate=less borrowing, lower interest rate=more borrowing

How do businesses decide where to invest?

expected return>expected cost

Factors other than interest rate

1. acquisition, maintenance and operating costs (inverse)

2. businesses taxes (inverse)

3. Rate of Innovation and tech (change)

4. Amount of capital have on hand (you dont buy more if you have unused stock)

A”

Aggregate sum total

AD

RGDP at all possible price levels

Increased price level

decreased output

Decreased price level

increased output

AD downsloping

change in price level = movement along the curve

Real Wealth Effect

Change in price level = change in purchasing power

Interest Rate Effect

price level increasing = more money needed

Net Export Effect

price level increasing = Americans buy foreign goods

AD shifts

Change in C, I, G, Nx

AS

price level and RGDP

SRAS

short run aggregate supply

SRAS upsloping

sticky wages (hard to change)

SRAS shifts

Input costs, productivity, change in inflation expectations, legal intervention

y

income

y star tells you

output and UE

LRAS

long run aggregate supply

LRAS shows

potential output

y(f)

fully employed RGDP

y (star)

shocks

positive shock

right

negative shock

left

stagflation

combination of recession and inflation have to wait it out

recession

y(f)>y(star), high UE=wages decrease=SRAS increasing

inflation

y(f)<y(star), low UE=wages increase=SRAS decreasing

Long Run Adjustment

how the economy fixes itself

Fiscal Policy

manipulation of public budget process to achieve, 1. Full Employment, 2. Create low inflation, 3. Allow for growth

Budget Process

taxing and spending

Discretionary

government takes action, change in taxes, change in spending

Automatic

built in stabilizer, no action

What curve does Fiscal Policy work through

AD curve

Recession AD

fix it by increasing

Inflation AD

fix it by decreasing

Budget Process Vocab

revenue: money coming in (taxes)

expendsures: money going out (spending)

R=E

balanced

R>E

surplus

R<E

deficit

Taxes

progressive, more you make the more you pay

Expansionary Fiscal Policy

recession, AD increasing, G increasing, T decreasing

Contractionary Fiscal Policy

inflation, AD decreasing, G decreasing, T increasing

LF

shows government borrowing

Supply of LF

people who save

Demand of LF

people who borrow

Change in interest rate

change in investment → change in AD and change in growth rate