unit 3: national income and price determination

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29 Terms

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RGDP and unemployment

  • higher levels of RGDP → unemployment

  • lower levels of RGDP → unemployment

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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

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wealth effect

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

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

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interest rate effect

  • at higher PL, nominal interest rates → investment

  • at lower PL, nominal interest rates → investment

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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

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shift of AD

  • caused by change in components of GDP

  • C+I+G+Xn

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disposable income

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

  • personal income - taxes = DI

  • spending’s + savings = DI

  • either spend or save

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MPC

  • marginal propensity (tendency) to consume

  • ∆ consumption / ∆ disposable income

  • MPC + MPS = 1

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MPS

  • marginal propensity (tendency) to save

  • ∆ savings / ∆ disposable income

  • MPC + MPS = 1

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spending multiplier

  • 1 / MPS

  • initial change * multiplier = total change in GDP

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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

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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)

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SRAS shifters (supply shocks)

  • resource prices (wages)

  • productivity (capital stock)

  • future inflation expectations

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resource prices

  • decrease wages → ↑ SRAS

  • increase wages → ↓ SRAS

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productivity

  • increase productivity → ↑ SRAS

  • decrease productivity→ ↓ SRAS

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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

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long run aggregate supply

  • vertical at full employment output

    • wages flexible in long run

  • RGDP = YF

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short-run equliibrium

  • at intersection of AD and SRAS

  • RGDP = Y1

  • PL * RGDP = nominal GDP

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inflationary gap

  • current output > long-run full employment output

  • unhealthy: operating above full employment, overworking

<ul><li><p>current output &gt; long-run full employment output</p></li><li><p>unhealthy: operating above full employment, overworking</p></li></ul><p></p>
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recessionary gap

  • current output < long-run full employment output

  • unhealthy: high unemployment > natural rate

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long-run equilibrium

  • current output = long run full employment output

  • unemployment = natural rate

  • cyclical unemployment = 0

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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

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fiscal policy

  • gov tools used to combat inflation / unemployment

    • change in taxes and gov spending

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fiscal policy - taxes

  • increase taxes → decrease disposable income → decrease consumer spending

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fiscal policy - gov spending

  • gov purchases

  • transfer payments

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

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expansionary fiscal policy

  • fight unemployment

    • increase gov spending/decrease taxes

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contractionary fiscal policy

  • fight inflation

    • decrease gov spending / increase taxes

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automatic stabilizers

  • limit fluctuations of business cycle

  • taxes

    • increase during expansions

    • decrease during contractions

  • transfer payments

    • decrease during expansions

    • increase during contractions

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