Term
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Definition
The Sum of all Spending in the economy.
GRAPH |
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Term
| What SPECIFIC 4 pieces does the Agg Demand model contain? |
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Definition
1. Consumption
2. Gov't spending
3. investment
4. net exports (exports-imports) |
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Term
| 3 Reasons why Agg Demand is in a downward Spiral |
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Definition
1. Wealth effect: When Prices DOWN, consumers have more purchasing power.
2. Interest rate effect: Prices DOWN, Interest rates DOWN, people borrow more.
3. international effect: Prices DOWN so our goods become cheaper to foreign people, so the US exports more.
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Term
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Definition
-# of consumers
-Income
-Expectation
-Demographics |
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Term
| Increase in Aggregate demand (as it applies to consumption) means: |
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Definition
# of consumers UP
Income UP
Optimistic
Younger population=More Spending |
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Term
| Decrease in Aggregate Demand (as it applies to consumption) Means: |
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Definition
# of consumers DOWN
Income DOWN
Pessimism
Older Population |
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Term
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Definition
Interest Rates
Excess capacity: A measure of business resources not being used. |
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Term
Increase in AGG Demand 2 (Investment)
Decrease in AGG Demand 2 (Investment) |
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Definition
Interest Rates DOWN
Little Excess Capacity
---
Interest Rates UP
Plenty of Excess Capacity |
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Term
| Government (as it applies to the Aggregate Demand model) |
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Definition
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Term
Increase in Aggregate Demand (Gov't)
Decrease in Aggregate Demand (Gov't) |
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Definition
INC: Taxes DOWN
Spending UP
DEC: Taxes UP
Spending DOWN |
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Term
| Net Exports (as it applies to AGG Demand) |
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Definition
Foreign Income
Foreign Price Level |
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Term
Increase in Aggregate Demand (Net Exports)
Decrease in Aggregate Demand (Net Exports) |
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Definition
INC: Foreign Income UP
Foreign Price Level UP
DEC: Foreign Income DOWN
Foreign Price Level DOWN |
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Term
| 3 Schools Of Economic Thought |
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Definition
I: Classical
II: Keynesian
III: Supply Side "Reaganomics" |
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Term
| Classical Theory Of Economics |
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Definition
-Adam Smith's. Wrote "Weath of Nations" 1789
-Economy Corrects itself
-NOT Pro Gov't Intervention
-Uses the Aggregate Demand Model
-Prices are Flexible |
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Term
| What got us out of Great Depression? |
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Definition
| WWII Or more accurately the massive Government spending associated with the War. |
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Term
| Keynesian Economic Theory |
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Definition
-Aggregate expenditures model
-Economies Can't Correct themselves
-PRO Government Intervention.
-Prices and wages stick.
-named for: John Maynard Keynes - British Economist made famous for General Theory of Employment, Interest and Money, (Advised Roosevelt and the formation of his New Deal policies)
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Term
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Definition
-Use a rise in aggregate supply to stimulate the economy
-Favors LESS Business Taxes
-And favors LESS Regulation
-Termed "Reaganomics" by some.
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Term
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Definition
Caused by increase in Agg Demand
GDP UP. GRAPH: |
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Term
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Definition
Stagflation Caused by Decrease in Agg Demand by higher resource price -Stagflation.
Price UP GDP DOWN
GRAPH |
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Term
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Definition
Decrease in Aggregate demand caused by consumers
GRAPH
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Term
How The economy Corrects itself:
(Need Graph AND Term+associated 4 pieces) |
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Definition
LRAS - Long Run Aggregate Supply: Full Capacity of the economy
1.) - Recession A-D Curves go left.
Shifts from AD0->AD1
2.) Prices fall from p0->p1 (Deflation)
3.) Prices of Inputs fall
4.) Lower resource prices = higher AGG Supply.
GRAPH; |
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Term
Aggregate Expenditures Model - Keynesian Theory
4 Components |
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Definition
1.) Gov't Spending
2.) Consumption
3.) Investment
4.) Net Exports
Same component IDEAS as Agg Demand model. Different components. Devil is in the details. |
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Term
| Consumption (FOR THE A.E. Model) |
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Definition
Autonomous Consumption
Doesn't Depend on income (eat, rent, etc).
Graph:
MPC: (Marginal Propensity to Consume) Percentage of increase in income I actually consume. |
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Term
| Investment + Gov't (As they apply to the A.E. Model) |
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Definition
Autonomous, Both stay the same as one another regardless of GDP.
(Graph)
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Term
| Net Exports (as they apply to A.E. Model) (And the first 2 Graphs associated with Nx) |
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Definition
Exports - Imports.
GRAPH
Trade Surplus - Exports are > than Imports
Trade Deficit - Exports are < than Imports
GRAPH 2 |
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Term
Net Exports (as they apply to A.E. Model) Last graph+Gaps)
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Definition
Last Graph
GDP Gap: Potential GDP-Actual GDP
Recessionary Gap: Increase in spending needed to close GDP Gap |
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Term
Circular Flow Diagram, Injections and Leakages
(list 3) |
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Definition
Graph
Injections: (Autonomous)
1.) Gov't Spending
2.) investments
3.) Exports
Leakages:
1.) Taxes
2.) Imports
3.) Savings |
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Term
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Definition
Good for an individual to save but everyone saving brings economy down
Equilibrium-Injections=Leakages |
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Term
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Definition
Multiplier = 1/Leakages = 1/Svg+*Tx+IMPorts
Savings measured in MPS
*Ignore TX because cities have sales tax. |
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Term
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Definition
MPS - Marginal Propensity to save
(% of an increase in income that is saved),
MPI - Marginal Propensity to Import
(% of an increase in income spent on imports.) |
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Term
Consumption (Formula)
MPC |
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Definition
Consumption = A+ (MPC x Income)
MPC (Marginal propensity to consume)=
% of an increase in income that is consumed. |
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Term
Consumption+Savings Formulae
APC (And formula)
APS (And formula)
Real World Multiplier |
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Definition
APC = (Avg. Propensity to consume)
Total C/Total I= 2500/2000 = 1.25*
*=if >1 we are dissaving
APS = 1 - APC. 1-1.25= .25
(APS=Avg. propensity to save)
MPC+MPS=1
Multiplier in real world = or around 2.
APS+APC MUST=1. |
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Term
| 3 Reasons why fiscal policy may not work |
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Definition
1.) Ricardian Equivalence - When gov't borrows more to increase spending, people spend less and save more to prepare for future tax increases.
2.) Crowding out effect when a gov't increases its borrowing and interest rates increases.
3.) Lags: takes 6-18 months for fiscal policy to work.
a.) takes congress + economists several months to realize there's a problem.
b.) takes 3-6 months to formulate policy
c.) After implemented takes 3-12 months to work. |
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