Economics: Aggregate Demand/Supply, Fiscal Policy, Taxes, and Budget Concepts

What does aggregate demand represent?

The total amount of goods and services demanded in an economy at different price levels.

Why does the aggregate demand curve slope downward?

Because of the inverse relationship between price level and real GDP demanded.

What is the Wealth Effect?

When prices fall, people's money has more purchasing power, leading to increased spending.

How does the Interest Rate Effect influence aggregate demand?

Lower price levels lead to lower interest rates, making borrowing cheaper and encouraging spending.

What is the Foreign Purchases Effect?

When U.S. prices fall, American goods become cheaper for foreign buyers, increasing exports and decreasing imports.

What is the formula for aggregate demand?

AD = C + I + G + Xn, where C is consumer spending, I is investment spending, G is government spending, and Xn is net exports.

What happens to aggregate demand when consumer spending increases?

The aggregate demand curve shifts to the right.

What causes the aggregate demand curve to shift left?

Decreased consumer spending, business investment, government spending, or increased taxes.

What does aggregate supply represent?

The total amount of goods and services firms are willing to produce at different price levels.

What characterizes the immediate short-run aggregate supply curve?

It is horizontal, indicating fixed prices where firms produce whatever is demanded.

How does the short-run aggregate supply curve behave?

It slopes upward due to sticky costs, especially wages, that do not adjust immediately.

What does the long-run aggregate supply curve indicate?

It is vertical, showing that the economy is producing at its full-employment output.

What shifts the aggregate supply curve to the right?

Decreased input costs, falling wages, improved technology, and increased worker productivity.

What is macroeconomic equilibrium?

It occurs where aggregate demand equals aggregate supply, determining real GDP and price level.

What is demand-pull inflation?

Inflation that occurs when aggregate demand increases too much, leading to higher price levels and output.

What is cost-push inflation?

Inflation that occurs when aggregate supply decreases, leading to higher prices and lower output.

What characterizes a recession in the AD-AS model?

A decrease in aggregate demand leading to lower output and higher unemployment.

What is a budget deficit?

When the government spends more than it collects in taxes during one year.

What is a budget surplus?

When the government collects more in taxes than it spends during one year.

What is a balanced budget?

When government spending equals tax revenue.

What is the difference between a budget deficit and national debt?

A deficit is the yearly overspending, while national debt is the total accumulated amount the government owes.

How does a budget deficit affect national debt?

The deficit adds to the national debt, increasing the total amount owed.

What are the major categories of federal spending?

Social Security, Medicare and Medicaid, National defense, Interest payments on the debt, Education, transportation, environment, courts, law enforcement, and other programs.

What is mandatory spending?

Spending required by existing law, such as Social Security, Medicare, and Medicaid.

What is discretionary spending?

Spending that Congress must approve each year, including defense spending, education programs, and transportation projects.

What are the main sources of federal revenue?

Individual income taxes, payroll taxes, corporate income taxes, excise taxes, and estate and gift taxes.

What is a progressive tax?

A tax where higher-income individuals pay a higher percentage, such as the federal income tax.

What is a proportional tax?

A tax where everyone pays the same percentage, such as the Medicare payroll tax.

What is a regressive tax?

A tax that takes a larger percentage of income from lower-income individuals than from higher-income individuals, such as sales tax.

What is a marginal tax rate?

The tax rate paid on the next dollar earned; only income within a specific tax bracket is taxed at that rate.

What is fiscal policy?

The use of government spending and taxes to influence the economy, affecting aggregate demand.

What is expansionary fiscal policy?

A policy used to fight recessions and unemployment by increasing aggregate demand through increased government spending or tax cuts.

What is contractionary fiscal policy?

A policy used to fight inflation by decreasing aggregate demand through reduced government spending or increased taxes.

What is discretionary fiscal policy?

Fiscal policy that occurs when the government passes a new law to change spending or taxes.

What are automatic stabilizers?

Government programs that automatically help stabilize the economy without new laws, such as unemployment insurance and progressive income taxes.

What is the standardized employment budget?

An estimate of what the federal budget deficit or surplus would be if the economy were operating at potential GDP.

What is crowding out?

The phenomenon where government borrowing increases interest rates, reducing private investment.

What are the three types of fiscal policy lags?

Recognition lag, legislative lag, and implementation lag.

Who holds the U.S. public debt?

Domestic investors, foreign investors, banks and financial institutions, state and local governments, the Federal Reserve, and U.S. citizens.

What is a common misconception about the U.S. public debt?

That the U.S. will go bankrupt like a household; the government can tax, borrow, and manage the money supply.

What is a misconception about the necessity to pay off the national debt?

That the debt must be fully paid off soon; governments often refinance debt by issuing new bonds.

What is a misconception about future generations and public debt?

That they will have to pay all of it directly; they may also inherit public investments and a larger economy.

Is all debt automatically bad?

No, while excessive debt can be harmful, borrowing can also be beneficial during recessions or for long-term investments.

What is the significance of the debt-to-GDP ratio?

It shows debt compared to the size of the economy, indicating that a large debt is less concerning if the economy is also large and growing.

What is the projected depletion date for Medicare?

Around 2026.

What is the projected depletion date for Social Security?

Around 2034.

What does it mean if trust funds for Medicare and Social Security become depleted?

Benefits may need to be reduced unless policy changes occur.

Name one possible policy fix for funding issues in Social Security.

Raising payroll taxes.

What was the goal of the 2008 stimulus checks?

To increase aggregate demand by encouraging consumer spending.

What was a key feature of the 2009 American Recovery and Reinvestment Act?

It included spending increases and tax cuts to combat the Great Recession.

What is an example of expansionary fiscal policy?

The 2020 CARES Act, which included stimulus checks and expanded unemployment benefits.

What are some arguments for a balanced budget?

Government should not spend more than it earns; deficits add to national debt and can increase interest payments.

What do critics argue against a required balanced budget?

Recessions require deficit spending, and a balanced budget rule could force cuts during economic downturns.

How does expansionary fiscal policy affect aggregate demand?

It shifts aggregate demand to the right.

What happens to tax revenue during recessions?

Tax revenue falls, while government spending often increases, leading to larger deficits.

What is aggregate demand?

Total spending in the economy.

What is the difference between mandatory and discretionary spending?

Mandatory spending is required by law, while discretionary spending is approved each year.

What is an automatic stabilizer?

A program that stabilizes the economy without new laws.

What is the recognition lag in fiscal policy?

The time it takes to identify an economic problem.

What is the legislative lag in fiscal policy?

The time it takes to pass a fiscal policy law.

What is the implementation lag in fiscal policy?

The time it takes to carry out the policy.