Kathy's AP Macroeconomics Blog

Unit 3: Fiscal Policy (04.03.18) Fiscal Policy Changes in the expenditures or tax revenues of the federal govt Gov't controls fiscal policy (Congress & the POTUS) Two tools: Taxes: govt can increase or decrease taxes Spending: govt can increase or decrease spending Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth Two options:  Discretionary Fiscal Policy (action) expansionary fiscal policy - think deficit contractionary fiscal policy - think surplus Non-Discretionary Fiscal Policy (no action) Contractionary v. Expansionary Fiscal Policy Contractionary: policy designed to decrease AD strategy for controlling inflation inflation is countered decrease govt spending (G) & increase taxes (T) Expansionary policy designed to increase AD strategy for increasing GDP, combatting a recession, & reducing unemployment recession is countered increase govt spending (G)...

Unit 3: Multipliers Spending Multiplier Effect an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand multiplier =  △ AD /  △ spending (C, Ig, G, Xn) why does this happen? expenditures & income flow continuously which sets off a spending increase in the economy can be calculated from the MPC or MPS multiplier = 1 / (1-MPC) or 1 / MPS multipliers are positive when there is an increase in spending and negative when there is a decrease Tax Multiplier when the govt taxes, the multiplier works in reverse because now money is leaving the circular flow tax multiplier = -MPC / (1-MPC) or -MPC / MPS if there is a tax cut, then the multiplier is positive because there is now more money in the circular flow

Unit 3: Consumption & Savings (03.23.18) Disposable Income income after taxes or net income DI = (gross income - taxes) households can either... consume (spend money on goods & services) save (not spend money on goods & services) Consumption household spending the ability to consume is constrained by... the amount of disposable income the propensity to save do households consume if D = 0? autonomous consumption dissaving Saving household NOT spending the ability to save is constrained by... the amount of disposable income the propensity to consume do households save if D = 0? NO Avg. Propensity To Consume/Save (APC & APS) APC + APS = 1 1 - APC = APS 1 - APS = APC APC > 1: dissaving -APS: dissaving Marginal Propensity To Consume/Save (MPC & MPS) MPC: the fraction of any change in disposable income that is consumed △ C /  △ DI % of every extra dollar earned that is spent MPS: the f...

Unit 3: Investment Demand Investments Money spent or expenditures on: new plants (factories) capital equipment (machinery) technology (hardware & software) new homes inventories (goods & sold by producers) Expected Rate of Return How does business make investment decisions? cost / benefit analysis How does business determine the benefits? expected rate of return How does business count the cost? interest costs How does business determine the amount of investment they undertake? compare expected rate of return to interest cost if expected return > interest cost, then invest if expected return < interest cost, then do not invest Real v. Nominal Interest Rate nominal is the observable rate of interest real subtracts out inflation and is only known ex post factor Investment Demand Curve (ID) What is the shape of the ID curve? downward sloping Why? when interest rates are high, fewer investments are more profitable; w...

Unit 3: The AS/AD Model The AS/AD Model the equilibrium of AS & AD determines current output (RGDP) and the price level Full Employment full employment equilibrium exists where AD intersects SRAS & LRAS at the same point denoted by Yf or Y* Recessionary Gap a recessionary gap exists when equilibrium occurs below full employment output Inflationary Gap an inflationary gap exists when equilibrium occurs beyond full employment output Changes In AD Consumption (C): C ↑ : AD -> , RGDP ↑ , PL ↑ , u% ↓  , &  π% ↑ C ↓ : AD <- , RGDP ↓ , PL ↓ , u% ↑ , &  π% ↓ Gross Private Investment (Ig): Ig ↑: AD -> , RGDP↑, PL↑, u% ↓, &  π% ↑ Ig ↓: AD <- , RGDP ↓, PL ↓, u%↑, &  π%↓ Government Spending (G): G ↑: AD -> ,  RGDP ↑, PL ↑, u%↓, & π% ↑ G ↓: AD <- , RGDP ↓, PL ↓, u%↑, & π% ↓ Net Exports (Xn): Xn ↑: AD -> , RGDP ↑, PL ↑, u%↓,...

Unit 3: Aggregate Supply Aggregate Supply the level of RGDP that firms will produce at each price level Long-Run Short-Run - period of time where input prices are completely flexible and adjust to changes in the price-level - the level of RGDP supplies is independent of the price level - period of time where input prices are sticky and do not adjust to changes in the price level - the level of RGDP supplied is directly related to the price level Long-Run Aggregate Supply (LRAS) marks the level of full employment in the economy (analogous to PPC) Short-Run Aggregate Supply (SRAS) because input prices are sticky in the short run, the SRAS is upward sloping changes in SRAS increases in SRAS: shift to the right (<--) decreases in SRAS: shift to the left (-->) key to understanding shifts in SRAS is per unit cost of production per-unit production cost: (total input cost) / (total output cost) Determinants of S...