Econ AD, AS, Fiscal Policy

Aggregate Demand Determinants

consumer spending, investment spending, govt spending, net exports, additional multipliers

AD Real wealth effect

Price level increase = money person has buys less = spend less

AD Interest rate effect

Price level increase = demand for money increases = interest rates increase = difficult to borrow money = investment decreases

AD Foreign purchases effect

Price level increase = exports decrease = imports increase = net exports decrease

AS immediate short run line

horizontal; same price, any quantity 

AS immediate short run why horizontal line

fixed input prices, fixed output prices; due to contractual agreement, sticky prices, menu costs

AS short run slope and why

upwards exponentially due to Sticky wages, Misperception theory

AS short run meaning

as price level increases, real GDP supplied increases;  fixed input price, variable output prices

AS short run shift which direction

right

Aggregate supply short run determinants

input prices, productivity, legal institutions

AS Long run line

vertical; variable input prices, variable output prices

AS long run meaning

as price level increases, real GDP supplied stays same; economy produces at full capacity

Changes in demand may affect prices _____

but not output or unemployment in long run

shift in LRAS meaning

economic growth

AS Ratchet Effect

When demand falls, firms keep price and lower output; sticky prices

AS Reasons for sticky prices

fear of price wars, menu costs, wage contracts (minimum wage), morale and productivity (efficiency wages)

why fiscal policy

combat cyclical changes; done by changing govt spending, taxes

John Maynard Keynes

father of macroeconomics, argued for fiscal policy to correct economy during Great Depression

Fiscal policy multipliers meaning

how much govt spending, taxes impact gdp

fiscal policy examples

Govt spending is direct component of GDP, Taxes change households’ disposable income (income after deduction of taxes) = changes in expenditures

Expansionary fiscal policy meaning

govt attempts to boost economic activity to fight recession

Expansionary fiscal policy does what

Increase govt spending = more money flow, Tax cuts = households have more disposable income to spend

Expansionary fiscal policy goal

increase AD, GDP, reduce unemployment

Contractionary fiscal policy meaning

govt attempts to slow down economy

Contractionary fiscal policy does what

Decrease govt spending = less money flow, Increase taxes = less disposable income

Contractionary fiscal policy goal

reduce AD, inflation, prevent economy from overheating