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Study Guide Test 2 - Macroecon

by: Sydney Dowd

Study Guide Test 2 - Macroecon Principles of Macroeconomics

Sydney Dowd
GPA 4.0

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About this Document

These notes cover EVERYTHING from Chapters 13-15, the subjects of the test on March 28th, 2016. They include a graph, definitions, explanations, and examples from all the days of material.
Principles of Macroeconomics
Elena Andreyeva
Study Guide
Econ, Study Guide, test, budget, federal, LRAS, SRAS
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This 6 page Study Guide was uploaded by Sydney Dowd on Saturday March 12, 2016. The Study Guide belongs to Principles of Macroeconomics at Georgia State University taught by Elena Andreyeva in Spring 2016. Since its upload, it has received 199 views. For similar materials see Principles of Macroeconomics in Economcs at Georgia State University.


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Date Created: 03/12/16
Macroeconomics Study Guide / Test 2 / Chapters 13­15 / Spring 2016 Chapter 13 Aggregate Demand (AD): total demand for all goods/services (GDP) in an economy  AD=C+I+G+NX Movements along the AD line:  1. Wealth effect: change in how much you can do with your money (will cause C↑ = downward movement along AD curve, or vice versa) 2. Interest rate effect: if interest rates (i) goes up, then investment (I) goes down = movement downwards along AD curve 3. International trade effect: If prices for US goods increases, exports decrease and imports increase = movement upwards along AD curve.  Shifts creating new AD lines to the left or right:  if increase if decrease Real wealth  shift right  shift left Expected income changes shift right shift left Consumer confidence shift right shift left Foreign income / wealth shift right shift left Exchange rates  shift left shift right (US dollar value)  Expected price levels shift left shift right Aggregate Supply Long­Run Aggregate Supply (LRAS)  affected by changes in less/more supply of goods or services in long term. These either shift the line left or right. (changes in tech or resource) ex: New technology! = products can be made faster = higher GDP and LRAS shift to the right Short­Run Aggregate Supply (SRAS)  affected by sticky prices, moves for similar cause as LRAS *note, when LRAS shifts, SRAS will shift also!  Sticky Input Prices: prices which are negociated ahead of time, take time to adjust to changes (ex: wages, resource prices, etc)   Menu Costs: costs with changing prices, make output prices sticky  (ex: if steak price falls and you don’t reprint the menu so that steak is cheaper, then you will lose customers, thus your output falls)   Money illusion: when workers/firms don’t want to accept lower wages or pay, even if the change will not affect the amount their money is worth. (can make firms lower output instead of cutting wages)  Chapter 14 Great Recession of 2008 ­ officially lasted Dec ’07 – June ‘09 ­ caused by trouble in ’07 financial markets and housing markets  ­ declining housing values, uninsured mortgages = LRAS shifts left, SRAS shifts left ­ Price level ↑ and Y↓  AD decrease:  expected income  ↓ real wealth ↓  ­ housing / stock fall  SRAS:  foreclosures  lost housing value ­ firms lose money The Great Depression  ­ Oct 29, 1929 – “Black Tuesday” stock market crash due to overinvesting, risky investments  ­ Banks nationwide went bankrupt (lots of invested money came from banks!)  ­ Closures led to business layoffs  ­ Consumer uncertainty / pessimism caused C↓ ­ Agricultural suffering due to weather ­ Crop decrease = farmers cannot pay loans  ­ Unemployment  ­ Taxes (raised by FDR + Hoover, caused more AD decrease)  ­ Smoot­Hawley Tariff Act: charged extra money from companies importing goods, countries  began to tax US exports in return, US goods fell in global demand New Deal (FDR) program helps economy through public works, helping farmers, etc.  ­ Official end to Great Depression after WW2  ­ Output (Y) falls  Changes in graph:  ­ AD falls, massively (consumers are too poor to purchase)  Causes of the Great Depression 1. Macroeconomic policy: little understanding of macroeconomics, government intervention 2. Fiscal policy: government taxes and spending to influence economy 3. Monetary policy: increasing or decreasing money supply Big Disagreements in Macroeconomics  Classical Economics   AD can move, LRAS does not move   SRAS does NOT exist (no sticky prices)   Economy will return to LRE (equilibrium) naturally  Hands­off, no government intervention  Supply­side economics Say’s Law: classical belief, if something is produced it will be consumed AKA “If you built it, they will come” Expected $ = actual $ Keynesian Economics Proposed by John Maynard Keynes  adjustments = long, unpredictable, many delays  Government help is good  We should not fail to acct when the economy suffers   Wages are sticky downwards (people are unwilling to accept lower pay, even  when interest lowers and they won’t have real losses)  High wages = labor market doesn’t reach equilibrium = full employment not  restored = prolonged recession   Stimulating aggregate demand  economy gets better  (AKA stimulus package) Greek Economic Crisis  Budget deficits, tax evasion, credit risk due to misinterpreted debt status Receives financial help from France, Germany, etc. on condition of austerity measures  Austerity measures required: raise taxes, cut government spending, fix tax evasion issues  Chapter 15 Budget deficit: money spent is more than money earned Government budgets: plans for spending and raising funds for government Gov. outlays: things the government plans to spend on Mandatory outlays: (majority of budget) Social Security, Medicare, NOT altered during  budgeting process! Changes to outlays can be made by laws only.  Discretionary outlays: altered through budgeting process yearly, funds for bridges, roads,  payments to government employees, defense spending.  Transfer payments: payments to an induvidual NOT in return for good/service  (ex: Social Security, welfare, etc)  government outlays=govspending+transfer payments Government revenues: taxes, national park admission fees, tariffs, etc.  Social Security: government­administered retirement program, established in 1935 by FDR’s New  Deal, payed into by workers.  ­ In the past, it worked because there were many workers and few retirees (required 2% of  wages, ½ paid by workers and ½ by employers) ­ Now, Social Security tax is 12.4%. Many Baby Boomers are retiring, and fewer workers are  contributing  Medicare: federally­funded healthcare for retirees (est. 1965, Lyndon Johnson)  ­ Workers must pay Medicare taxes with promise of coverage when they retire  Demographic changes: biggest reason why Social Security and Medicare make up large portion of  budget 1. Longer life expectancy 2. Fewer workers paying in 3. Baby Boomers retiring  Spending and Current Fiscal Issues 1. Increased government spending  Defense spending increased after 9/11  Great Recession and stimulus package, fiscal policy 2008  Increased spending on Social Security and Medicare  2. How government raises revenue  Payroll taxes (taken from paychecks)   Other tax revenue sources (corporate, estate, etc)  3. Social Insurance Taxes   Taxes only applicable on first $110,100 made!   Revenue goes to SS, Medicare trust funds  How Payroll Taxes Work  Progressive tax rates: more income = more tax Marginal tax rate: only apply to dollars within a certain bracket, different tax rates apply to different  portions of income!  example: $67,000 annual wage  first portion: 8,700 x (0.1) = $870 second portion: (35,350 – 8,701) x (.15) = $3,997.35 third portion: (67,000 – 35, 351) x (.25) = $7,912.25 Add all numbers together = 870 + 3997.35 + 7912.25 = $12, 779.06 is total income tax paid Average tax rate: total tax paid divided by taxable income (always less than marginal amount)  Historical Income Tax  Income tax is 100 years old in the US  Rates rose quickly (highest ever in 1945, highest bracket paid 94%)  Before income tax, most taxes were gained from import tariffs  Key Changes ­ 1930s, Hoover and Roosevelt, top rate = 80% ­ 1963, JFK lowered from 90% to 70% ­ 1980s, Reagan lowered top and all rates, top = 28% ­ 1993, Clinton raised top rate to 39% Top Payers of Income Tax ­ The top 20% of wage­earners pay 96% of all income tax revenue  ­ Lowest tiers receive more money from government than they pay  The Budget Deficit  ­ when outlays > revenues  ­ GDP­to­debt ratio is IMPORTANT because it shows if there’s more debt than production  happening in a nation  ­ increase during recessions, when revenue falls, when outlays increase Budget surplus = when revenues > outlays  Debt is all the budget deficits (unpaid) added up Deficit from a SINGLE year Publicly­held national debt is more than foreign. (70% is domestically owed, 30% internationally)  The difference between the total national debt and the publicly held national debt is the money  government agencies owe themselves. 


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