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Marginal propensity to consume
how much people consume when there is a change in disposable income.
change in spending/change in disposable income
Marginal Propensity to save
How much people save.
Change in Saving/Change in disposable income
What is the Spending Multiplier?
Measures the impact of an initial change in spending on the overall economy. Calculates how much total economic output increases as a result of that initial spending.
Tax multiplier formula
-MPC/MPS
Shifers of the Aggregate Demand Curve
Consumer spending
Investment Spending
Gov Spending
Net exports
Shifters of the SRAS Curve
Change in resource prices/wages
Change in producer expectations
Change in government action
Change in productivity (new tech)
Shifters of the LRAS Curve
Changes in quality/quantity of resources
Technology
Discretionary Fiscal Policy
Government action: spending + taxes to change aggregate demand in response to inflation/recession
Non-discretionary Fiscal Policy
Policies that automatically adjust government spending and taxes without the need for gov action, often triggered by inflation/recession.
Tax cuts vs Gov Spending to close gap
Tax cuts increase disposable income, while government spending directly injects money into the economy, both aimed at boosting aggregate demand.
Interest Rate Effect
The impact on aggregate demand as changes in interest rates influence consumer and business spending. When interest rates fall, borrowing becomes cheaper, leading to increased spending and investment.
Real Wealth Effect
The change in consumer spending that occurs when the value of real estate or stocks, increases or decreases, affecting perceptions of wealth and therefore aggregate demand.
Foreign Trade Effect
Changes in the exchange rate, which affects the price of exports and imports. When a country's currency depreciates, exports become cheaper and imports more expensive.
Why is the SRAS sloping upward, and LRAS vertical?
The SRAS curve is sloped upward because wages are sticky and not willing to adjust to price levels.
LRAS is sloped vertical because resource prices/wages ARE willing and flexible to changes in price level.
