Econ 2013 Final Exam Study Guide print this and fold paper in half to quiz yourself Question Chapter 10 changes foreseen by individuals giving them time to adjust before the changes occur changes that are not foreseen 6 Shifters Of Aggregate Demand This includes assets and potential income This is inversely related to how much households consume and businesses invest Optimism shifts Aggregate Demand AD curve right or left Pessimism shifts AD curve right or left This index measures how optimistic people are If people expect the inflation rate to increase what will happen to their spending now If foreign income increases what happens to Aggregate demand If the dollar depreciates what happens to the aggregate demand curve changes will shift both the LRAS and SRAS curves changes shift only the SRAS curve The average amount of output is called 3 Shifters of Long Run Aggregate Supply LRAS 3 Shifters of Short Run Aggregate Supply SRAS Answer Anticipated Changes Unanticipated changes 1 Change in Real Wealth 2 Change in Real Interest Rate 3 Changes in Expectations 4 Changes in Expected Rate of Inflation 5 Changes in Income Abroad 6 Changes in Exchange Rates Real wealth Real wealth AD shift to right Real Interest Rate Real Interest Rate c I AD Right Left Consumer Sentiment Index They will increase spending now AD shifts right AD AD curve shifts right AD Permanent temporary Productivity a Change in resource base Resource base LRAS b Change in level of technology Technology LRAS c Changes in institutions Productive LRAS a Change in Resource Prices Presource SRAS b Change in Expected Rate of Inflation expected inflation SRAS c Supply Shocks Positive supply Supply Shocks any unexpected event that temporarily affects aggregate supply changes in LRAS cause both LRAS and SRAS curve to shift in the same direction Anticipated Change in technology invention of a new efficient engine changes in AD cause both AD and the SRAS curve to shift in opposite direction When there is an unanticipated change in AD the real interest rate increases or decreases changes in SRAS only shifts the SRAS curve and it shifts back into its original position 2 causes of a recession 2 causes of an expansion 3 facts that imply the economy can correct itself without any government intervention Peoples consumption depends on their long run expected perminant income rather than their current income People will during expansions savings during recessions Recession Less investment Low interest rates Higher consumption and investment Expansion More investment High interest rate Low consumption and investment Chapter 11 believes that market and resource prices are flexible and allow the economy to self correct fairly quickly believe that market and resource prices are inflexible and therefore the market will not be able to quickly correct itself 2 Y PI Yf Unanticipated changes Decreases r C I AD w SRAS Unanticipated 1 An unanticipated fall in aggregate demand AD 2 An unanticipated fall in Short Run Aggregate Supply SRAS 1 An unanticipated rise in aggregate demand 2 An unanticipated rise in SRAS 1 Consumption demand is relatively stable 2 Changes in real interest rates stabilize aggregate demand and redirect economic fluctuations 3 Changes in real resource prices will help redirect economic fluctuations Permanent Income Hypothesis Save during expansions Spend savings during recessions Know this Classical Economics Keynesian Economics Breakdown of the 2 2 reasons for sticky wages and prices 1 trade unions and large corporations enter into long term contracts the costs of changing prices The amount of additional income that is consumed equation A change in expenditures will have a greater impact than the initial Change equation For the multiplier to be effective it must come from resources that otherwise would have been government revenue taxes is equal to government expenditures T G government spending is greater than government revenues T G government revenue is greater than government spending T G Changes in the size of the deficit or surplus can have 2 main sources Deliberate changes in tax or policy 2 parts of Keynesian Fiscal Policy 2 parts of Restrictive Fiscal policy T or F Keynesians believed in the use of counter cyclical policy rather than balancing budget a policy that moves the economy in the opposite direction from the forces of the business cycle Effectiveness of fiscal policy is reduced by the following 3 problems 2 menu costs Menu Prices Marginal propensity to consume MPC MPC additional consumption additional income E xpenditure Multiplier M M 1 1 MPC unemployed Balanced Budget Budget deficit Budget Surplus 1 A reflection of the state of the economy 2 Discretionary Fiscal Policy Fiscal Policy 1 Increasing government expenditures and or 2 Reducing tax rates 1 Decreasing government expenditures and or 2 Raising tax rates True Counter Cyclical Policy 1 Our ability to forecast is extremely limited Recognition Lag 2 Change in fiscal policy requires legislative action which takes a long time administrative lag 3 A change in fiscal policy will not have an immediate impact on the economy impact lag Automatic Stabilizers Built in features that automatically promote a budget deficit during a recession and budget a surplus during an expansion even without a change in policy T or F Politicians have a tendency to overuse expansionary policy even when its not called for especially around election time Both Keynesian and Classical believe these 3 True 1 Proper timing is crucial and hard to things High tax rates retard growth because of these 3 things achieve economy thought 2 Automatic stabilizers help redirect the 3 Fiscal policy is less potent than originally 1 High tax rates discourage effort and productivity 2 High tax rates reduce capital formation 3 High tax rates encourage people to purchase goods that are less desired just because they are tax deductible Supply side Economics the belief that changes in the marginal tax rate will exert important effects on aggregate supply higher or Lower marginal tax rate will give people the incentive to work more T or F if the lower marginal tax rate is believed to be long term than it will shift both SRAS and LRAS Supply side econ is a long on short run growth oriented strategy not a short run stabilization tool Lower True Long Chapter 12 a reduction in private spending due to higher interest rates generated by budget deficits financed through government borrowing 5 parts to the
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