unit 3: national income and price determination

Bruh

RGDP and unemployment

RGDP and unemployment

• higher levels of RGDP → unemployment ↓

• lower levels of RGDP → unemployment ↑

aggregate demand

• demand for all g/s in economy

• point on curve: RGDP for given PL

• inverse relationship

  • wealth effect, interest rate effect, Xn effect

wealth effect

• when PL ↑, wealth buys fewer g/s → RGDP ↓

• when PL ↓, wealth buy more g/s → RGDP ↑

interest rate effect

• at higher PL, nominal interest rates ↑ → investment ↓

• at lower PL, nominal interest rates ↓ → investment ↑

net exports effect

• at higher PL, foreign consumers purchase less of US goods → Xn ↓

• at lower PL, foreign consumers purchase more of US goods → Xn ↑

shift of AD

• caused by change in components of GDP

• C+I+G+Xn

disposable income

• $ that consumers have available to spend on g/s

• personal income - taxes = DI

• spending’s + savings = DI

• either spend or save

MPC

• marginal propensity (tendency) to consume

• ∆ consumption / ∆ disposable income

• MPC + MPS = 1

MPS

• marginal propensity (tendency) to save

• ∆ savings / ∆ disposable income

• MPC + MPS = 1

spending multiplier

• 1 / MPS

• initial change * multiplier = total change in GDP

tax multiplier

• -MPC / MPS

• | tax multiplier | = spending multiplier - 1

  • 1 less bc impact of tax on economy is indirect

• use tax multiplier with transfer payments

short-run aggregate supply

• supply for all g/s in economy

• direct relationship

  • wages and prices do not change quickly in response to changes in PL (sticky)

SRAS shifters (supply shocks)

• resource prices (wages)

• productivity (capital stock)

• future inflation expectations

resource prices

• decrease wages → ↑ SRAS

• increase wages → ↓ SRAS

productivity

• increase productivity → ↑ SRAS

• decrease productivity→ ↓ SRAS

inflation expectations

• lower prices: businesses lower prices (due to less profit expectations), workers lower wage expectations

• higher prices: businesses increase prices, workers demand higher wages

long run aggregate supply

• vertical at full employment output

  • wages flexible in long run

• RGDP = Y_F

short-run equliibrium

• at intersection of AD and SRAS

• RGDP = Y₁

• PL * RGDP = nominal GDP

inflationary gap

• current output > long-run full employment output

• unhealthy: operating above full employment, overworking

recessionary gap

• current output < long-run full employment output

• unhealthy: high unemployment > natural rate

long-run equilibrium

• current output = long run full employment output

• unemployment = natural rate

• cyclical unemployment = 0

long-run self adjustment

• no gov. action

• recessionary gap

  • lower prices: businesses lower prices (due to less profit expectations), workers lower wage expectations

• inflationary gap

  • higher prices: businesses increase prices, workers demand higher wages

fiscal policy

• gov tools used to combat inflation / unemployment

  • change in taxes and gov spending

fiscal policy - taxes

• increase taxes → decrease disposable income → decrease consumer spending

fiscal policy - gov spending

• gov purchases

• transfer payments

  • increase → increase consumer spending, decrease → decrease consumer spending

expansionary fiscal policy

• fight unemployment

  • increase gov spending/decrease taxes

contractionary fiscal policy

• fight inflation

  • decrease gov spending / increase taxes

automatic stabilizers

• limit fluctuations of business cycle

• taxes

  • increase during expansions

  • decrease during contractions

• transfer payments

  • decrease during expansions

  • increase during contractions