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Andrew Lin Mr Zizza AP Econ 92713 Module 3 Outline The Production Possibilities Curve Model Tradeoffs The Production Possibilities Curve o One makes a tradeoff when one gives up something in order to have something else o Economists often use the production possibilities curve model to think about the tradeoffs necessary in any economy o If a production point lies inside or on the curve it is feasible However if a production point lies outside of the curve it isn t feasible Efficiency o An economy is efficient if there are no missed opportunities meaning that there is no way to make some people better off without making other people worse off o An economy is inefficient if there is a way to make some people better off without making anyone worse off o If an economy is producing at a point on its production possibilities curve the economy is efficient in production An economy is inefficient when it is missing the opportunity to produce more of goods o Efficiency for the economy as a whole requires both efficiency in production and efficiency in allocation Opportunity Cost o The PPC is also useful as a reminder that the true cost of any good is not only its price but also everything else in addition to money that must be given up in order to get that good known as the opportunity cost If the PPC has a constant slope or is a straight line there will be a constant opportunity cost If the PPC is a bowedout curve there will be an increasing opportunity cost As more of a good is produced its opportunity cost typically rises because wellsuited inputs are used up and less adaptable inputs must be used instead Economic Growth Economic growth results in an outward shift of the PPC because production possibilities are expanded The economy can produce more of everything One general source of economic growth is an increase in the resources used to produce goods and services labor land capital and entrepreneurship The other is progress in technology the technical means for the production of goods and services If an economy loses resources or technology the economy s PPC shifts inward and the economy has become smaller Andrew Lin Mr Zizza AP Econ C Block 10613 Module 4 Outline Comparative Advantage and Trade Gains from Trade o The key to a much better standard of living for everyone is trade in which people divide tasks among themselves and each person provides a good or service that other people want in return for different goods and services that he or she wants c There are gains from trade people can get more of what they want through trade than they could if they tried to be selfsufficient o This increase in output is due to specialization each person specializes in the task that he or she is good at performing Comparative Advantage and Gains from Trade o The production possibilities curve model is particularly useful for illustrating gains from trade which is based on comparative advantage o An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people c As long as people have different opportunity costs everyone has a comparative advantage in something and everyone has a comparative disadvantage in something o An individual has an absolute advantage in producing a good or service if he or she can make more of it with a given amount of time and resources Having an absolute advantage is not the same thing as having a comparative advantage Comparative Advantage and International Trade o Mutual gains don t depend on each country s being better at producing one kind of good Even if one country has higher output per personhour in both industries even if one country has an absolute advantage in both industries there are still mutual gains from trade Andrew Lin Mr Zizza AP Econ C Block 101113 Module 5 Outline Supply and Demand Supply and Demand A Model of a Competitive Market o A competitive market is a market in which there are many buyers and sellers of the same good or service The key feature of a competitive market is that no individua s actions have a noticeable effect on the price at which the good or service is sold c When a market is competitive its behavior is well described by the supply and demand model Due to the fact that many markets are competitive the supply and demand models are very useful c There are five key elements in the supply and demand model 1 the demand curve 2 the supply curve 3 the set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift 4 the market equilibrium which includes the equilibrium price and equilibrium quantity 5 the way the market equilibrium changes when the supply curve or demand curve shifts The Demand Curve o A table known as a demand schedule can be used to draw a demand curve which shows the amount of goods or services consumers will want to buy at a number of different prices c As the price rises the quantity demanded of a good or service or the actual amount consumers are willing to buy at some specific price falls o A demand curve is a graphical representation of the demand schedule which is another way of showing the relationship between the quantity demanded and the price The proposition that a higher price for a good with all other things being equal leads people to demand a smaller quantity of that good is so reliable that economists call it the law of demand The change in demand shows the increase shift in the quantity demanded at any given price Movements along the demand curve are changes in the quantity demanded of a good that result from a change in that good s price Economists believe that there are five principal factors that shift the demand curve for a good or service Changes in the prices of related goods or services Changes in income Changes in tastes Changes in expectations Changes in the number of consumers Changes in the Prices of Related Goods or Services Two goods are substitutes if a rise in the price of one good makes consumers more willing to buy the other good Two goods are complements if a rise in the price of one good makes consumers less willing to buy the other good When a rise in income increases the demand for a good it is a normal good When a rise in income decreases the demand for a good it is an inferior good Economists usually lump together changes in demand due to fads beliefs and cultural shifts under the heading of changes in tastes or preferences A change in tastes has a predictable impact on demand When tastes change in favor of a good more people want to buy it at any given price so the demand curve shifts to the right When tastes change against a good fewer people want to buy it at any given price so the demand curve shifts to the left An individual demand curve shows the relationship between quantity demanded and price for an individual consumer The market demand curve shows how the combined quantity demanded by all consumers depends on the market price of that good It is the horizontal sum of the individual demand curves of all consumers in that market Andrew Lin Mr Zizza AP Econ C Block 101813 Module 6 Outline Supply and Demand Supply and Equilibrium The Supply Schedule and the Supply Curve o The quantity supplied is the actual amount of a good or service producers are willing to sell at some specific price o A supply schedule shows how much of a good or service producers will supply at different prices o A supply curve shows the relationship between quantity supplied and price o The law of supply says that other things being equal the price and quantity supplied of a good are positively related Shifts of the Supply Curve o A change in supply is a shift of the supply curve which changes the quantity supplied at any given price o A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good s price Understanding Shifts of the Supply Curve o Economists believe that shifts of the supply curve for a good or service are mainly the result of five factors 1 Changes in input prices 2 Changes in the prices of related goods or services 3 Changes in technology 4 Changes in expectations 5 Changes in the number of producers An input is anything that is used to produce a good or service There are substitutes in production eg gasoline and other coproduced oil products There are complements in production eg crude oil oil well drillers An individual supply curve shows the relationship between quantity supplied and price for an individual producer The market supply curve shows how the combined total quantity supplied by all individual producers in the market depends on the market price of that good Supply Demand and Equilibrium An economic situation is in equilibrium when no individual would be better off doing something different The price that matches the quantity supplied and the quantity demanded is the equilibrium price The quantity bought and sold at that price is the equilibrium quantity The equilibrium price is also known as the marketclearing price which is the price that clears the market by ensuring that every buyer willing to pay that price finds a seller willing to sell at that price There is a excess supply surplus of a good when the quantity supplied exceeds the quantity demanded Surpluses occur when the price is above its equilibrium level There is a shortage excess demand of a good when the quantity demanded exceeds the quantity supplied Shortages occur when the price is below its equilibrium level Andrew Lin Mr Zizza AP Econ C Block 102513 Module 7 Outline Supply and Demand Changes In Equilibrium Changes in Supply and Demand What Happens When the Demand Curve Shifts An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity What Happens When the Supply Curve Shifts An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity Simultaneous Shifts of Supply and Demand Curves When demand increases and supply decreases the equilibrium price rises but the change in the equilibrium quantity may vary When demand decreases and supply increases the equilibrium price falls but the change in the equilibrium quantity may vary When both demand and supply increase the equilibrium quantity increases but the change in equilibrium price may vary When both demand and supply decrease the equilibrium quantity decreases but the change in equilibrium price may vary Andrew Lin Mr Zizza AP Econ C Block 11113 Module 8 Outline Supply and Demand Price Controls Ceilings and Floors Why Governments Control Prices o Price controls are legal restrictions on how high or low a market price may go o A price ceiling is a maximum price sellers are allowed to charge for a good or service o A price floor is a minimum price buyers are required to pay for a good or service Inefficient Allocation to Consumers o Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers people who want the good badly and are willing to pay a high price don t get it and those who care relatively little about the good and are only willing to pay a relatively low price do get it Wasted Resources o Price ceilings typically lead to inefficiency in the form of wasted resources people expend money effort and time to cope with the shortages caused by the price ceiling lnefficiently Low Quality o Price ceilings often lead to inefficiency in that the goods being offered are of inefficiently low qualityseers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price Black Markets o A black market is a market in which goods or services are bought and sold illegally either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling So Why Are There Price Ceilings We have seen three common results of price ceilings 1 A persistent shortage of the good 2 lnefficiency arising from this persistent shortage in the form of inefficiently low quantity inefficient allocation of the good to consumers resources wasted in searching for the good and the inefficiently low quality of the good offered for sale 3 The emergence of illegal black market activity Price Floors The minimum wage is a legal floor on the wage rate which is the market price of labor How a Price Floor Causes lnefficiency Inefficient Allocation of Sales Among Sellers Price floors lead to inefficient allocation of sales among sellers those who would be willing to sell the good at the lowest price are not always those who manage to sell it lnefficiently High Quality Price floors often lead to inefficiency in that goods of inefficiently high quality are offered sellers offer highquality goods at a high price even though buyers would prefer a lower quality at a lower price So Why Are There Price Floors To sum up a price floor creates various negative side effects 1 A persistent surplus of the good 2 lnefficiency arising from the persistent surplus in the form of inefficiently low quantity inefficient allocation of sales among sellers wasted resources and an inefficiently high level of quality offered by suppliers 3 The temptation to engage in illegal activity particularly bribery and corruption of government officials Andrew Lin Mr Zizza AP Econ C Block 112613 Module 9 Outline Supply and Demand Quantity Controls Controlling Quantities o A quantity control or quota is an upper limit on the quantity of some good that can be bought or sold a A license gives its owner the right to supply a good or service The Anatomy of Quality Controls o The demand price of a given quantity is the price at which consumers will demand that quantity o The supply price of a given quantity is the price at which producers will supply that quantity o A quality control or quota drives a wedge between the demand price and the supply price of a good which is the price paid by buyers sends up being higher than that received by sellers o The difference between the demand and supply price at the quota amount is the quota rent which are the earnings that accrue to the licenseholder from ownership of the right to sell the good or the market price of the license when the licenses are traded The Costs of Quantity Controls o The deadweight loss is the lost gains associated with transactions that do not occur due to market intervention Andrew Lin Mr Zizza AP Econ C Block 112613 Module 10 Outline The Circular Flow and Gross Domestic Product The National Accounts The national income and product accounts often referred to simply as the national accounts keep track of the spending of consumers sales of producers business investment spending government purchases and a variety of other flows of money among different sectors of the economy The CircularFlow Diagram The circularflow diagram is a simplified representation of the macroeconomy which shows the flows of money goods and services and factors of production through the economy The Simple Circular Flow Diagram A household consists of either an individual or a group of people who share their income A firm is an organization that produces goods and services for sale it also employs members of households Product markets are where households buy the goods and services they want from firms Factor markets are where firms buy the resources especially capital and labor they need to produce goods and services The Expanded CircularFlow Diagram Consumer spending is household spending on goods and services A stock is a share in the ownership of a company held by a shareholder A bond is a loan in the form of an IOU that pays interest Government transfers are payments that the government makes to individuals without expecting a good or service in return Disposable income is equal to income plus government transfers minus taxes and is the total amount of household income available to spend on consumption and to save Private savings is equal to disposable income minus consumer spending and is disposable income that is not spent on consumption Financial markets are the banking stock and bond markets which channel private savings and foreign lending into investment spending government borrowing and foreign borrowing Government borrowing is the amount of funds borrowed by the government in the financial markets Government purchases of goods and services are the total of purchases made by federal state and local governments and includes everything from military spending on ammunition to your local public schoo s spending on chalk and erasers Exports are goods and services sold to other countries Imports are goods and services purchased from other countries Inventories are stocks of goods and raw materials held to facilitate business operations Investment spending is spending on new productive physical capital such as machinery and buildings and on changes in inventories Gross Domestic Product Final goods and services are goods and services sold to the final or end user Intermediate goods and services are goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services Gross domestic product or GDP is the total value of all final goods and services produced in an economy during a given year c There are three ways to calculate GDP survey firms and add up the total value of their production of final goods and services add up aggregate spending on domestically produced final goods and services in the economy or sum the total factor income earned by households from firms in the economy o Aggregate spending is the total spending on domestically produced final goods and services in the economy consumer spending investment spending government purchases of goods and services and exports minus imports Measuring GDP as the Value of Production of Final Goods and Services o The value added of a producer is the value of its sales minus the value of its purchases of inputs Measuring GDP as Spending on Domestically Produced Final Goods and Services o Net exports are the difference between the value of exports and the value of imports GDP What s In and What s Out Included o Domestically produced final goods and services including capital goods new construction of structures and changes to inventories Not Included o Intermediate goods and services c Inputs o Used goods o Financial assets such as stocks and bonds o Foreignproduced goods and services Andrew Lin Mr Zizza AP Econ C Block 12813 Module 11 Outline Interpreting Real Gross Domestic Product Real GDP A Measure of Aggregate Output o Aggregate output is the total quantity of final goods and services produced within an economy Calculating Real GDP o Real GDP is the total value of all final goods and services produced in the economy during a given year calculated using the prices of a selected base year c Nominal GDP is the total value of all final goods and services produced in the economy during a given year calculated with the current prices in the year in which the output is produced o Chainlinking is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year What Real GDP Doesn t Measure o GDP per capita is GDP divided by the size of the population it is equivalent to the average GDP per person Andrew Lin Mr Zizza AP Econ C Block 121513 Module 12 Outline The Meaning and Calculation of Unemployment The Unemployment Rate Defining and Measuring Unemployment Employed people are currently holding a job in the economy either full time or part time Unemployed people are actively looking for work but aren t currently employed The labor force is equal to the sum of the employed and the unemployed The labor force participation rate is the percentage of the population aged 16 or older that is in the labor force The unemployment rate is the percentage of the total number of people in the labor force who are unemployed The Significance of the Unemployment Rate Discouraged workers are nonworking people who are capable of working but have given up looking for a job due to the state of the job market Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work The underemployed are people who work part time because they cannot find fulltime jobs Module 13 Outline The Causes and Categories of Unemployment The Natural Rate of Unemployment Job Creation and Job Destruction 0 Job separations are terminations of employment that occurred because a worker was either fired or quit voluntarily Frictional Unemployment o Workers who spend time looking for employment are engaged in job search o Frictional unemployment is unemployment due to the time workers spend in job search Structural Unemployment o Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate It occurs when the wage rate is persistently above the wage rate at equilibrium o Several factors can lead to a wage rate in excess of wage rate at equilibrium minimum wages labor unions efficiency wages and the side effects of government policies o Efficiency wages are wages that employers set above the equilibrium wage rate as an incentive for their workers to deliver better performance The Natural Rate of Unemployment o The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates It is the rate of unemployment that arises from the effects of frictional plus structural unemployment o Cyclical unemployment is the deviation of the actual rate of unemployment from the natural rate or the difference between the actual and natural rates of unemployment Changes in the Natural Rate of Unemployment o The most important factors that causes the natural rate of unemployment to change are changes in the characteristics of the labor force changes in labor market institutions and changes in government policies Andrew Lin Mr Zizza AP Econ C Block 122113 Module 14 Outline Inflation An Overview Inflation and Deflation The Level of Prices Doesn39t Matter o The real wage is the wage rate divided by the price level o Real income is income divided by the price level But the Rate of Change of Prices Does o The inflation rate is the percent change per year in a price index typicay the consumer pnceindex ShoeLeather Costs o Shoeleather costs are the increased costs of transactions caused by inflation Menu Costs o Menu costs are the real costs of changing listed prices UnitofAccount Costs o Unitofaccount costs arise from the way inflation makes money a less reliable unit of measurement Winners and Losers from Inflation o The nominal interest rate is the interest rate actually paid for a loan o The real interest rate is the nominal interest rate minus the rate of inflation Inflation Is Easy Disinflation Is Hard o Disinflation is the process of bringing the inflation rate down Module 15 Outline The Measurement and Calculation of Inflation Price Indexes and the Aggregate Price Level o The aggregate price level is a measure of the overall level of prices in the economy Market Baskets and Price Indexes o A market basket is a hypothetical set of consumer purchases of goods and services c A price index measures the cost of purchasing a given market basket in a given year The index value is normalized so that it is equal to 100 in the selected base year The Consumer Price Index o The consumer price index or CPI measures the cost of the market basket of a typical urban American family Other Price Measures o The producer price index or PPI measures changes in the prices of goods and services purchased by producers o The GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in thatyean Andrew Lin Mr Zizza AP Econ C Block 11014 Module 16 Outline Income and Expenditure The Multiplier An Informal Introduction The marginal propensity to consume or MPC is the increase in consumer spending when disposable income rises by 1 MPC AConsumer spendingADisposabe income The marginal propensity to save or MPS is the increase in household savings when disposable income rises by 1 Total increase in real GDP from 100 billion rise in I 1 1 MPC X 100 billion An autonomous change in aggregate spending is an initial rise or fall in aggregate spending that is the cause not the result of a series of income and spending changes The multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change Assuming no taxes and no trade the total change in real GDP caused by an autonomous change in aggregate spending is AY 1 1 MPC gtltAAAS So the multiplier is Multiplier AYI AAAS 1 1 MPC Consumer Spending Current Disposable Income and Consumer Spending The consumption function is an equation showing how an individual househod s consumer spending varies with the household s current disposable income Autonomous consumer spending is the amount of money a household would spend if it had no disposable income The simplest version of a consumption function is a linear equation c a MPCgtlt yd In this equation c is individual household consumer spending and yd is individual household current disposable income MPC is the ratio of a change in consumer spending to the change in current disposable income For an individual household MPC AcAyd Multiplying both sides by Aydwe get MPCgtlt Ayd Ac which tells us that when yd goes up by 1 c goes up by MPCgtlt 1 Since MPC is defined as AcAydthe slope of the consumption function is Slope of consumption function Rise over run AcAyd MPC The aggregate consumption function is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending CA MPCgtlt YD Investment Spending Planned investment spending is the investment spending that businesses intend to undertake during a given period Planned investment spending depends on three principal factors the interest rate the expected future level of real GDP and the current level of production capacity Inventories and Unplanned Investment Spending Inventories are stocks of goods held to satisfy future sales Inventory investment is the value of the change in total inventories held in the economy during a given period Positive unplanned inventory investment occurs when actual sales are less than businesses expected leading to unplanned increases in inventories Sales in excess of expectations result in negative unplanned inventory investment Actual investment spending is the sum of planned investment spending and unplanned inventory investment Module 17 Outline Aggregate Demand Introduction and Determinants Aggregate Demand o The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households businesses the government and the rest of the world Why Is the Aggregate Demand Curve Downward Sloping o The wealth effect of a change in the aggregate price level is the change in consumer spending caused by the altered purchasing power of consumers assets o The interest rate effect of a change in the aggregate price level is the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money Shifts of the Aggregate Demand Curve o Changes in expectations If consumers and firms become more optimistic aggregate demand increases If consumers and firms become more pessimistic aggregate demand decreases o Changes in wealth If the real value of household assets rises aggregate demand increases If the real value of household assets falls aggregate demand decreases o Size of the existing stock of physical capital If the existing stock of physical capital is relatively small aggregate demand increases If the existing stock of physical capital is relatively large aggregate demand decreases 0 Fiscal policy lfthe government increases spending or cuts taxes aggregate demand increases lfthe government reduces spending or raises taxes aggregate demand decreases Monetary policy If the central bank increases the quantity of money aggregate demand increases Ifthe central bank reduces the quantity of money aggregate demand decreases Fiscal policy is the use of taxes government transfers or government purchases of goods and services to stabilize the economy Monetary policy is the central bank s use of changes in the quantity of money or the interest rate to stabilize the economy Andrew Lin Mr Zizza AP Econ C Block 11014 Module 18 Outline Aggregate Supply Introduction and Determinants Aggregate Supply o The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy The ShortRun Aggregate Supply Curve o Profit per unit of output Price per unit of output Production cost per unit of output o The nominal wage is the dollar amount of the wage paid o Sticky wages are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages o The short run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run the time period when many production costs can be taken as fixed Shifts of the Short Run Aggregate Supply Curve o If commodity prices fall short run aggregate supply increases o If commodity prices rise short run aggregate supply decreases o If nominal wages fall short run aggregate supply increases o If nominal wages rise short run aggregate supply decreases o lfworkers become more productive short run aggregate supply increases o lfworkers become less productive short run aggregate supply decreases The LongRun Aggregate Supply Curve o The longrun aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices including nominal wages were fully flexible o Potential output is the level of real GDP the economy would produce if all prices including nominal wages were fully flexible o Rightward shifts of the LRAS curve factors related to long run growth I increases in the quantity of resources including land labor capital and entrepreneurship I increases in the quality of resources as with a bettereducated workforce I technological progress Andrew Lin Mr Zizza AP Econ C Block 12514 Module 19 Outline Equilibrium in the Aggregate DemandAggregate Supply Model The ADAS Model The ADAS model is the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations ShortRun Macroeconomic Equilibrium The economy is in shortrun macroeconomic equilibrium when the quantity of aggregate output supplied is equal to the quantity demanded The shortrun equilibrium aggregate price level is the aggregate price level in the shortrun macroeconomic equilibrium Shortrun equilibrium aggregate output is the quantity of aggregate output produced in the short run macroeconomic equilibrium Shifts of Aggregate Demand ShortRun Effects An event that shifts the aggregate demand curve is a demand shock An event that shifts the short run aggregate supply curve is a supply shock Stagflation is the combination of inflation and stagnating or falling aggregate output The economy is in longrun macroeconomic equilibrium when the point of shortrun macroeconomic equilibrium is on the long run aggregate supply curve There is a recessionary gap when aggregate output is below potential output There is an inflationary gap when aggregate output is above potential output The output gap is the percentage difference between actual aggregate output and potential output Output gap Actua aggregate output Potential output Potential output X 100 o The economy is selfcorrecting when shocks to aggregate demand affect aggregate output in the short run but not the long run Andrew Lin Mr Zizza AP Econ C Block 13114 Module 20 Outline Economic Policy and the Aggregate Demand Aggregate Supply Model Macroeconomic Policy Stabilization policy is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions Policy in the Face of Demand Shocks Why might a policy that shortcircuits the adjustment and maintains the economy at its original equilibrium be desirable For two reasons the temporary fall in aggregate output that would happen without policy intervention is a bad thing particularly because such a decline is associated with high unemployment Second price stability is generally regarded as a desirable goal Responding to Supply Shocks The right response isn t obvious if using monetary or fiscal policy to shift the aggregate demand curve in response to a supply shock is considered There will be a fall in aggregate output leading to a rise in unemployment and a rise in the aggregate price level Any policy that shifts the aggregate demand curve helps one problem only by making the other worse If the government acts to increase aggregate demand and limit the rise in unemployment it reduces the decline in output but causes even more inflation If it acts to reduce aggregate demand it curbs inflation but causes a further rise in unemployment Fiscal Policy The Basics Changes in the federal budget changes in government spending or in taxation can have large effects on the American economy Most US government spending on transfer payments is accounted for by three big programs I Social Security which provides guaranteed income to older Americans disabled Americans and the surviving spouses and dependent children of deceased beneficiaries I Medicare which covers much of the cost of healthcare for Americans over age 65 I Medicaid which covers much of the cost of healthcare for Americans with low incomes Social insurance programs are government programs intended to protect families against economic hardship Fiscal policy that increases aggregate demand called expansionary fiscal policy normally takes one of three forms I an increase in government purchases of goods and services I a cut in taxes I an increase in government transfers Fiscal policy that reduces aggregate demand called contractionary fiscal policy is the opposite of expansionary fiscal policy It is implemented by I a reduction in government purchases of goods and services I an increase in taxes I a reduction in government transfers
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