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| Question | Answer |
| The Quantity of Real GDP supplied | Is the amount of final goods and services that firms plan to produce |
| What does Real GDP supplied rely on | The four factors of production 1. Labor Employed 2. Capital, Human Capital and state of technology 3. Land and Natural Resources 4. Entrepreneurial Talent |
| What happens at full employment | The real wage rate makes supply and demand of labor at equilibrium. Over the business cycle the quantity of labor supplied fluctuates and so does the real GDP around the Pot GDP |
| Aggregate Supply | Is the relationship between the quantity of Real GDP supplied and the price level when all other influences remain the same (How much GDP firms are going to make) |
| What effects the Quantity supplied of Aggregate Supply | 1. Price Level |
| Price Level (Change in Quantity Supplied of Aggregate Supply) | When the price level rises the real wage rate remains the same so it means labor is cheaper and production increases causing a increase in Quantity supplied of Aggregate Supply. V.V. |
| What 3 things changes aggregate supply | 1. Potential GDP 2. Money Wage Rate Change 3. The Money Prices of other resources change |
| Potential GDP (Change in Supply of AS) | Anything that changes the Potential GDP changes the aggregate supply. When it moves left the supply increases and V.V. |
| Change In Money Wage Rate (Change of Supply for AS) | When the money wage rate changes the cost of firms change. When the wage rate goes higher the cost rises and the less Real GDP will be supplied. V.V. |
| Change in Money Prices of Other Resources. (Change of supply of AS) | A change in price of resources affects the cost of the firms. When it rises costs rise and firms make less Real GDP lowering the AS. V.V. |
| The Quantity of Real GDP demanded | Is the total amount of final goods and services produced in the United States that people, businesses, governments, and foreigners plan to buy. ( How much Real GDP households, governments and firms plan to buy) |
| Aggregate Demand | Is the relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same. |
| What are the four things that change the quantity demanded of AD | 1. Price Level 2. Buying Power of Money 3. Real Interest Rates 4. Real Prices of Exports and Imports |
| Price Level (Quantity demanded of AD) | When price level falls the amount demanded increases and V.V. |
| The Buying Power of Money (Quantity demanded of AD) | A rise in price level decreases buying power of money. Because things are more expensive people will save more and Quantity of Real GDP will decrease. |
| Real Interest Rates (Quantity demanded of AD) | When price level rises the real interest rate rises. An increase in price level makes people need more money to get stuff so the demand for money increases and the interest rate rises |
| The Real Prices of Exports and Imports (Quantity demanded of AD) | When the price level rises the goods of a country increases so people will by foreign goods and the quantity of real GDP demanded is less. |
| Aggregate Demand | When the aggregate demand increases it moves right horizontally on the graph |
| What are the three factors that change Aggregate Demand | 1. Expectations of the Future 2. Fiscal Policy and Monetary Policy 3. The State of the World Economy |
| Expectations (Demand of AD) | Increases 1. Inflation: People will buy more before inflation happens. V.V 2. Income: People will buy more because they can afford it V.V. 3. Future Profit: Firms will invest more because they have the money V.V. |
| Fiscal Policy and Monetary Policy (Demand of AD) | Governments use Fiscal Policy to create a tax cuts or increases gov. expenditure to promote demand of AD. V.V. Federal Reserve uses Monetary Policy to cut interest rates or quantity of money to increase demand of AD. V.V. |
| Fiscal Policy | Is the changing of taxes and transfer payments and government expenditures on goods and services. (What government uses it money on budget) |
| Monetary Policy | Is the changing the quantity of money and interest rate |
| World Economy (Demand of AD) | Foreign Exchange Rate and Foreign Income. When the dollar loses power foreign rates change and people will buy more because it's cheaper. V.V. When Foreign Income Increases more people will buy. V.V. |
| The Aggregate Demand Multiplier | Is an effect that magnifies changes in expenditure plans and brings potentially large fluctuations in aggregate demand (It makes the changes bigger. This affects the amount people buy and brings fluctuations) |
| How does the Aggregate Demand Multiplier work | The increase in aggregate demand begins with the increase of expenditure and then add the effect of the consumption expenditure. The change in expenditure causes a change in income. Because income is changed the consumption expenditure changes. |
| Macroeconomic Equilibrium | Occurs when the quantity of Real GDP Demanded equals the quantity of Real GDP Supplied |
| The Macroeconomic Equlibrium fluctuates around full employment (Pot GDP) What are the Equilibriums called. | 1. Full Employment Equilibrium 2. Recessionary Gap 3. Inflationary Gap |
| Full Employment Equlibrium | When equilibrium real GDP equals potential GDP |
| Recessionary Gap | When employment is below the Pot. GDP and brings falling price levels |
| Inflationary Gap | When the employment is above the Pot GDP and brings rising price levels |
| Economic Growth and Inflation explained on ASAD graph | Increases in labor productivity and labor force increase Pot. GDP. Increase in Pot GDP is economic growth. Inflation is when aggregate demand rises quicker than the pot. GDP can. |
| Real Business Cycle | Aggregate supply fluctuates because labor productivity grows at a variable pace, which brings fluctuations in the growth rate of potential GDP.The swings in aggregate demand occur more quickly than changes in the aggregate supply. |
| Demand-Pull inflation | When aggregate demand is increased but the quantity of money does not increase |
| Cost-push inflation | An inflation that starts because aggregate supply. Quantity of money doesn't grow enough |
| Fiscal Policy | Is the use of the federal budget to achieve the macroeconomic objectives of high and sustained economic growth and full emplyment |
| Fiscal Year | Begins on Oct. 1 and Prez. and Congress make budget |
| National Debt | National Debt is the sum of every year's deficit. Gov has to be in a deficit so that it can have a National debt. (National Budget Debt= Tax revenues - Outlays) |
| Where do Tax Revenues come from | Income Tax, Social Security Tax, Corporate Tax, and Indirect Taxes. (Sale Taxes) |
| Transfer Payments | This is the biggest outlay (Expense) of the government and is social security benefits, medicaid, unemployment etc. Other expenditures include defense and debt interest |
| What is happening with the Social Security department | Baby boomers are receiving benefits and the debt is overwhelming and the U.S. can't afford it. We need to raise taxes, social security taxes, cut social security or cut other government spending |
| Why do Mainstream Economist think about Keynesians | The believe they overestimate the power of the multiplier and their theories don't work quick enough. |
| How does Fiscal Policy affect AD | Other things remaining the same any change in the budget affects the AD. 1. Discretionary Fiscal Policy 2. Automatic Fiscal Policy |
| Automatic Fiscal Policy | Is a fiscal policy action that is triggered by the state of the economy. Ex when employment goes down people get more unemployment benefits |
| Discretionary Fiscal Policy | Is a fiscal policy action that is initiated by an act of congress EX. Increase in defense spending |
| What are Automatic Stabilizers and Induced Taxes | Automatic stabilizers are features of fiscal policy that stabilize Real GDP without explicit action by the government. Induced taxes are taxes that vary with real GDP. This all happens because outlays and revenues fluctuate with the Real GDP |
| Needs Tested Spending | IS spending on programs that entitle suitably qualified people and businesses to receive benefits- benefits that vary with need and with the state of the economy |
| What is the Difference between the Structural and Cyclical Surplus or Deficit | Structural S or D happens at full employment. Cyclical is the budget balance that comes from outlays and revenues. The actual budget is a combo of both. |
| How is Discretionary Fical Policy enacted | Fiscal Policy comes from las that make taxes and changes government outlays. Anything that changes in the gov. budget affects the aggregate demand and includes a multiplier effect |
| Government Expenditure Multiplier and what does it do | It is the change in how much the government spends on goods and services from aggregate demand. (Basically when the gov spends more, more goods are bought AD is increased. |
| Tax Multiplier and how does it work | It shows what the effect of a change in taxes has on aggregate demand. A change in taxes will change the disposable income. The increase in tax will lower disposable income creating a decrease in AD |
| Transfer Payments Multiplier and how does it work | Is the effect of transfer payment on AD. When there are more transfer payments you can get more money in people's hand and people have more to spend |
| Fiscal Stimulus | It is a increase in gov expenditure plus a increase in transfer payments and a decrease in taxes. They could also do a combo of the three |
| What are the limitations of Discretionary FIscal Policy | 1. Law making time lag 2. Shrinking area of lawmaker decision 3. Estimating Pot. GDP 4. Economic Forecasting |
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