Unit 3 Exam Review: Aggregate Demand and Supply Fiscal Policy

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.