Unit 3: Aggregate Demand, Aggregate Supply, and Fiscal Policy, Slides of Economics

Download Unit 3: Aggregate Demand, Aggregate Supply, and Fiscal Policy and more Slides Economics in PDF only on Docsity! Unit 3: Aggregate Demand, Aggregate Supply, and Fiscal Policy AD, AS, and LRAS Short Run vs. Long Run Aggregate Supply Draw the economy at full employment 1. In the short run, wages and resource prices will r\ot: as price levels increase 2. In the long run, wages and resource prices will _ as price levels increase Shifters of AD and AS /fe. 6DFV Shifters of Aggregate Demand 1. * 3. <5- 4. 'Shifters of Aggregate Supply-^ 1 pl-l'ces 2 ■fcxxscC.S OLnd 3. pr<j«du.oHv»+y Recessionary Gap Inflationary Gap Draw an economy in a recession CMS Draw an economy with an inflationary gap jo** y, yre SPfV 1k. K 6PfV Graphing Practice Define Key Terms Draw an economy at full employment. Show what happens to price level and GDP if consumption falls iX*5 skAS Negative Supply Shock- Uncypectcr/ a. r«.s«urc-e Positive Supply Shock- urxe^cpecbex/ indr-CAS^. tfF r«SOlArcC. f“) Stagflation- V\i^h irvF |ajH'orv + K« Autonomous Consumption- .J-hg. ounaurri" people Spend even if 4f\ey Katvt pa ineome Disposable Income- ineome /FC (yl>p^ Classical vs. Keynesian Economics Fiscal Policy What is classical economic theory? ~Tht economy will, fi* T+self (SuppSy siiAc economicsJ xE no policy is enacteo.S^-A5 will ShifV taJcT-hJ cr*) What is Keynesian economic theory? 6’ey/t sKcm.I«I sfep in a.n<A- help -Wio economy back, -ft (v\\ emptojmen.t* Define Discretionary Fiscal Policy- Con^ress mu5f rva^.Ke polrcy -te cKttnge 6 or T Define Non-Discretionary Fiscal Policy- aubma+i'c shtloi h'zers 44\at cle not r)c,eal an act aF Cinyrcss Three Ranges of the Aggregate Supply Curve Government Spending and Taxation Draw and label the three ranges of the AS curve SR*S KoHlorv+icI £l(«-ynesfar\) ygyticai Expansionary Fiscal Policy- FCCC.S-S i Vro. <Srt _ _ . „ f*( mort- DX C if') Contractionary Fiscal Policy- inF'l ow £>k The Multiplier Effect 6bPr Simple Spending Multiplier Tax Multiplier What is the Multiplier Effect? A .smartI Chomoje in Spcnd-inj will crcajte ck lor-^« cJuxngc In AC> Define Marginal Propensity to Consume (MPC)- i-fow much people consume/sponcf of AcjUal or ey+rotr income Define Marginal Propensity to Save (MPS)- MoW much people Scxvc oP pouted or ©yArcL. income Policy and Multiplier Practice Price Level ERAS ifO billion AD $60 $100 Real GDP (billion) 1. Is there a recessionary or inflationary gap? 2. If the government does no policy and resource prices are flexible, in the long run wages will________and aggregate supply will A_____ 3. If fiscal policy is used to close they gap the government could f spending or y taxes on consumers Assume the MPC is .5: 4. What is the least amount of government spending that could potentially close the gap? Xs - 2 lo loillfm 5. How much could the government cut taxes to close the gap? */(ss| ^6 loi lli'An Now assume that the MPC is .8: 6. What is the least amount of government spending that could potentially close the gap? S milliffry Problem with Fiscal Policy Inflationary Expectations 1. Deficit Spending- occurs during a- recession . Congress Increases spendina w/otth increasing 2. Time Lags- TO-fieS policy paKes oc lonyHme -U implement’ 3 Crowding out- Congress ofeGat spends so 4hcy must La • • J-g ip , • dr • • 6rPP^ What happens to aggregate supply when people expect inflation? People rjillask for higher \aJa^s + input rr4'*/- costs *«7/ increase Csans p)