study guide for Macro exam 3
study guide for Macro exam 3 ECON 104
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This 3 page Study Guide was uploaded by Morgan Owens on Monday April 4, 2016. The Study Guide belongs to ECON 104 at George Mason University taught by Stephen Gillepsie in Summer 2015. Since its upload, it has received 35 views. For similar materials see Macroeconomics in Economcs at George Mason University.
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Date Created: 04/04/16
Keynesian model: concentrates on changes to AD and relationship of AD to decides they will be, they are determined by outside factors of the K AE. Equilibrium is where these two meet. model, not affected by changes in disposable income, interest rates or other variables. Its horizontal line. Spending is exogenous Because wages are sticky downward the AS curve will shift downward only a little bit when in a recession. To pull back up you Exports: decisions of foreign consumers, (not directly affected by have to increase AD. changes in domestic economy, however imports depend of level of disposable income) function of DI AD: total amount of goods and services produced over a period of time K model is in equilibrium when AE=AD, this means that there is overall glut or shortage of production. AE: total amount of goods and services purchased over a period of time When a K model is in disequilibrium there are unintended changes in business inventories Say’s Law: supply creates its own demand. Production generates income, which can only be spent on goods and When AP is lower than AE more is being bought than services that have been produced. produces, businesses are being drawn down, Ip is greater than actual investment, injections are larger than leakages, respond Keynes disputed Say’s: said that supply can be out of sync with by increasing production. demand, the circular flow is not a closed system, and there are leakages. When AP is higher than AE more is being produced than bought, businesses are building up, Ip is smaller than actual investment, AE: C + Ip + G +NE leakages are larger than injections, respond by decreasing production. Consumption demands: level of disposable income available to The multiplier: the ultimate size of the impact of an event on the households (more income at disposal= more likely to spend) economy is larger than the initial event, a onetime change in any component of AE is not the end of the story, sets off a chain reaction. Planned investment: depends on real interest rate, lower opp. Cost of Money multiplier = 1/(1MPC) borrowing= more businesses will want to spend. Function of IR MPC – the change in consumption divided by the change in income. Ip: spending on structures & equipment and intended changes in business inventories. Equilibrium is a K model: AP=AE, amount produced is equal to amount purchased. Ia: spending on structures and equipment and actual changes in Recessions: result of a fall in any of the components of AE which inventories. *Difference is unintended inventory changes. sets off the downward multiplier process. K says to get out of a recession is government spending. Government expenditures: decisions of government policy makers, they can spend whatever they chose. Whatever the government For a recession to end, we need to increase one or more of the CHAPTER 9: components of AE, meaning government spending. The increase in Fiscal policy: government action taken to counteract the business government expenditures will increase disposable income to cycle. households which increases consumption spending in response. It is designed to give a boost to a faltering economy and restrain a Makes an upward spiral of the multiplier process. booming economy. Helps keep the economy operating closer to potential GDP. 3 broad schools of macroeconomics: classical, Keynesian and Tax receipts come from the income taxes, social security taxes, Monetarist. Classical stresses the selfcorrecting nature of the excise taxes, import tariffs and fees. economy, argues that financial variable have little impact on real variables and government should do very little to try to manage Transfer payments: funds given by the government to individuals or equilibrium. The problem is that the real world persisted in acting groups, includes unemployment insurance, welfare programs, different than the model predicted it would. K overthrew the classical agriculture price support. model with “the general theory of employment, interest and money”, argued that wages are sticky downward so that it is possible for the Fiscal policy works by changing AE in a straightforward way, for economy to stay in a recessionary equilibrium. example, increased government expenditures directly increases AE, since G is a component of AE. Marginal tax rate: percent of new additional income that you pay in tax The effect of a balanced budget expansionary fiscal policy is to increase the size of the government sector relative to the sizes of the What causes curves to shift: decline in AD, creates a recessionary other sectors of the economy. GDP gap Designing a stimulus policy: it’s one thing to know that a stimulus is Recessionary gap: amount by which GDP is below potential GDP needed, it’s another to decide how much, how quickly and how long it should be applied for. Aim is to get back to equilibrium at potential GDP, need to know size of GDP gap and size of multiplier. MCP= 80%, GDP gap is 1000 billion, then we need 200 billion in stimulus to eliminate GDP gap. (0.2*1000 billion) How long? Need to know the length of the multiplier process so economy isn’t over heated, Where? Doesn’t really matter The first U.S practiced fiscal policy during the Great Depression, after WW2 fiscal policies became larger and more frequent Fiscal policy must be applied at the right time, right amount and right economy may have recovered by itself, and the expansionary policy pushes direction the economy into overheating Some things have very little lag, short term things that are done every week, Because of lags, fiscal policy is as likely to be procyclical as it is to so we reduce the lag and get information quickly. (Restaurants every countercyclical, can’t fix lags. Thursday night) Automatic stabilizers are fiscal policy tolls which are not subject to Some information can be used to predict thing that are going to happen, (leading economic indicators) so we can get an idea of what is going to the lags are affected by discretionary fiscal policy. Such as – federal income taxes, unemployment insurance act happen Index: averages together various hints about what is going to happen in the future and give us the best guess of what is going to happen in the business There are good reasons for doubting that discretionary fiscal policy cycle will be effective and the historical record supports this. Unavoidable nature on the index: Finding the right timing for fiscal policy is hard b/c there are lags. Decline of index of leading economic indicators to reduce the recognition lag, only problem with this is that that the decline of Recognition lag index has also declined when there is no recession. (likely to miss as It takes time for policy makers to realize that we have entered the much as you hit) downswing of the business cycle Administrative lag (to shorten this lag we could give the president Fast track authority) simply going to have to live with this Prior to the last recession, the 2 previous recessions were over before we Operational lag: government could have nice things on hand to do if officially recognized that they had begun we had a little more money, (stream gages, earthquake monitoring stations) we do not have to wait until they have stated that a recession has started, generally the signs are already there Automatic stabilizers are programs that automatically increase government Administrative lag spending when the economy contracts, and automatically decrease Changes in taxes and spending generally have to be passed by Congress government spending when the economy expands long and difficult process Programs that were not passed for the purpose of passing fiscal policy, but have a positive side effect of working in the direction of even if all members of Congress agree that a spending change is needed, the fiscal policy. They avoid all three lags they will all disagree about which programs should be changed The major automatic stabilizers are: taxes, unemployment insurance, welfare Operational lag Appropriated funds are not immediately spent programs Even when spent, the multiplier process takes time to work Result is, that by the time an expansionary fiscal policy takes effect, the
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