AP Economics Mod 16-21

Actions by Congress and by the President through taxation and government spending

Actions by the Federal Reserve Bank through decreasing interest rates and federal reserve rates

Laws that reduce unemployment and increase GDP by increasing government spending and/or decreasing taxes on consumers

Laws that reduce inflation and decrease GDP by decreasing government spending and/or enacting tax increases

changes in government spending of final goods

a change in taxes and transfers to households

1. Federal Reserve Bank's changes in the quantity of money or interest rates will shift the curve

2. Increasing the quantity of money shifts the AD curve to the right

3. Reducing the quantity of money supply will shift AD curve to the left.

Congress creates a law designed to change AD through govn't spending or taxation but time lags due to bureaucracy

automatic stabilizers; permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

the increase in consumer spending when disposable income rises by $1

= Change in consumer spending/Change in income

the increase in household savings when disposable income rises by $1

=Change in savings/Change in income

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending

The higher the MPC the higher the multiplier (the more money spent, the greater impact the multiplier will have).

an initial rise or fall in aggregate spending that is the cause, not the result, of a series of income and spending changes

multiplier x initial change in spending

1/MPS or 1/1-MPC

the relationship between consumption spending and disposable income

=a+MPCxYd a= autonomous spending Yd= disposable income

1. Changes in expected future disposable income: permanent income hypothesis (Milton Friedman, "Theory of the Consumption Function")

2. Changes in aggregate wealth: life-cycle hypothesis

1. Consumer Spending

2. Investment Spending

3. Government Spending

4. Net Exports (Exports - Imports)

AD=C+I+G+X

1. Change in Inflationary Expectations: If an increase in AD leads people to expect higher prices in the future, this increases labor and resource costs and decreases AS.

2. Change in Resource Prices: Supply shocks

3. Change in Actions of the government (NOT spending): taxes, subsidies, regulations

4. Change in Productivity

AS= I+R+A+P

An unexpected event that causes the short-run aggregate supply curve to shift

Shocks cause a shift in the aggregate demand or supply and can lead to this

when aggregate output is below potential output

when aggregate output is above potential output

consumer spending

spending on new productive physical capital, such as machinery and structures, and on changes in inventories.

Not as large as a piece of the GDP as consumer spending

Rising inventories typically indicates a slowing economy and vice-versa

Depends on three factors:

1. interest rates

2. Expected future GDP

3. Current level of production capacity

inverse

If price level increases (inflation) then real GDP demanded falls

If price level decreases (deflation) then real GDP demanded increases

Higher prices = less demand

Lower prices = greater quantity demanded

Shift in curve= change in demand

movement along the curve (prices)= change in quantity demanded

price and quantity supply have a direct relationship

At higher prices, profit seeking firms have an incentive to produce more

higher prices=greater quantity supplied

Occurs when quantity is not affected by change in price

1. Wealth effect

2. Interest-Rate Effect

3. Foreign Trade Effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.

Higher prices decreases purchasing power of money and decreases quantity of expenditures and vice-versa

As price levels increases, lenders need to charge higher interest rates to get a REAL return on their loans; higher interest rates discourage consumer spending and business investment

When U.S. price level rises, foreign buyers purchase fewer U.S. foods and Americans buy more foreign goods.

Wages and resources prices will NOT increase as price levels increase.

wages and resource prices will increase as price levels increase

the % difference between actual aggregate output and potential output

(Actual Aggregate output-potential output)/potential output

expected future disposable income

Fiscal and discretionary policy