C H A P T E R 1 0 B A S I C M A C R O R E L A T I O N S H P S I MACRO STUDY GUIDE TEST 3 CHAPTERS 10 12 13 End recession spending 45 consumption disposable income line o vertical distance between line and any point on horizontal axis measures amounts households plan to spend at diff levels of DI amounts households plan to save at diff levels of DI consumption DI Consumption schedule Saving schedule APC percentage of total income that s consumed o consumption income APS percentage of total income that s saved o saving income MPC proportion of any change in income consumed o change in consumption change in income MPS proportion of any change in income saved o change in saving change in income MPC MPS 1 Multiplier Effect change in GDP change in a component of total spending that leads to a larger o Number by which the amount of a capital investment is multiplied by to give the total amount by which the GDP is increased carry through effects o Initial change in spending sets of spending chain o change in RGDP 1 initial change in spending 1 MPC Determinants of Consumption o Income Wealth wealth effect consumption up savings down Borrowing Expectations Interest rates Determinants of Investment Real interest rate Costs Taxes Technology Stock of capital Inventory changes Expected rate of return MACRO STUDY GUIDE TEST 3 CHAPTERS 10 12 13 AD AS C I G Xn output from sellers o as price level goes up firms willing to produce more AD AS Curve relationship between spending and RGDP o Income determination model AD slopes downward prices demand prices money demand real interest rate o Real Balances Effect o Interest Effect investment demand o Foreign purchases Effect countries stop importing prices net exports price of domestic goods Exogenous AS Technology Cost of production Laws Business confidence Productivity Equilibrium P1 change in price level Y1 RGDP compare with FE to determine recession inflation AD Spending Taxes Dollar value Nx Wealth G Foreign income Borrowing Consumer confidence Full employment at RGDP 17 5 T Unemployment Rate 6 Recession FE right of Eq Inflation FE left of Eq Fiscal Policy changes in gov t spending and taxation designed to achieve FE and noninflationary domestic output Out of recession gov t spend half of GDP gap multiplier Gov t spending is better rather than decrease spending consumers save Spending multiplier Y k G Taxes Multiplier Y k MPC T Multiplier effect for taxes effect for gov t spending o Money saved rather than spent multiplier doesn t work o More capital goods C H A P T E R 1 2 A D A S C H A P T E R 1 3 F I S C A L P O L I C Y MACRO STUDY GUIDE TEST 3 CHAPTERS 10 12 13 Expansionary out of recession Taxes G AD shifts right Smaller MPC greater tax cut needed Tax cut G o Increase saving Contractionary out of inflation Taxes G AD shifts left G causes recession because of fixed price level ratchet effect Large gov t increase T and G G Pro large gov t G T Aids unemployed and Takes longer employed Timing Issues T Pro small gov t T G Takes shorter Affects employed Political cycles election motivated fiscal policy Recognition lag 4 6 months Administrative lag passing legislation Operational lag government projects require planning and construction o Rely more on tax change Built in Stabilizer no explicit action by policymakers Recession budget deficit spending revenue budget surplus Inflation budget deficit budget surplus Tax system G fixed Cost of National Debt Monetizing debt inflation 1 5 historically 4 Foreign held interest payment overseas Crowding out inflation o Fed increase borrowing r investments Distribution of income Psychological debt less likely to consume Debt is good dollar spent in debt better than cost Benefit Cost of Borrowing MACRO STUDY GUIDE TEST 3 CHAPTERS 10 12 13 War time Recession Paid back at less value interest rate Solutions Default o Costs credit rating dollar falls Raise taxes Decrease gov t spending unemployment Economic growth RGDP Balance Budget Bill Unemployed because tax revenues aren t met Gov t spending o Balances mess up AD shift Taxes Spending Back in a recession cycle continues Full Employment Budget Bill G T when GDP FE Surplus GDP FE Deficit GDP FE