Download CRAM Unit-3 Macro Review

Unit-3 Macro Review
AD/AS Model & Multipliers
LRAS1
Price
Level
P1
-----------------
SRAS1
E1
AD1
Y1
Real
GDP
AD/AS Model
• Short run AS curve is upward sloping
– Prices/wages are sticky
• Long Run AS curve is vertical
LRAS1
Price
Level
– Prices/wages are flexible
– At full employment output level
P1
-----------------
SRAS1
E1
AD1
AD = C + I + G + NX
• Consumption:
– The Wealth Effect
Y1
3 reasons AD slopes downward =>
• Investment:
– The Interest Rate Effect
• Net Exports:
– The Exchange-Rate Effect
Real
GDP
Recessionary Gap
Inflationary Gap
Economy below full output
Economy above full output
LRAS1
Price
Level
SRAS1
Price
Level
-----------
E1
----------
P1
Y1
--------------------
--------------
P1
LRAS1
AD1
Y*
Real
GDP
Unemployment high, output low
Below PPF, Actual Px level < Expected
Y*
SRAS1
E1
Y1
AD1
Real
GDP
Unemployment very low, output high
Above PPF, Actual Px level > Expected
Shifts in LRAS & SRAS
• If PPF goes right => LRAS shifts right
–
–
–
–
–
–
–
Expected Price Level
Input Prices
Labor
Capital
Natural resources
Technology
Gov’t Incentives
Shift SRAS ONLY (not LRAS)
Will shift BOTH curves (LRAS & SRAS, & PPF)
MPC, MPS & Multipliers
• Disposable Income (DI) = Gross Income – Net Taxes
– DI = Consumption + Savings
– MPC + MPS = 1
(assuming no Gov’t taxes or transfers)
• Multipliers:
– Spending Multiplier = 1/MPS
– Tax Multiplier = -MPC/MPS
– Balanced Budget Multiplier = 1
(always 1 less than spending)
3 Multipliers & Fiscal Policy
1) Gov’t Spending or Investment Multiplier =
– 1/MPS
– 1/.20 = 5
2) Tax Multiplier:
– -MPC/MPS
– -.80/.20 = -4
MPC = .80
MPS = .20
LRAS1
Price
Level
SRAS1
AD1
Tax Multiplier is
always 1 smaller
3) Balanced Budget Multiplier is always = 1
Real
GDP
Expansionary Fiscal Policy:
• Gov’t Spending 1 billion
•MPS = .25
•AD shifts right by 4 billion
(multiplier = 4)
Practice Questions
1
E
14
B
2
C
15
B
3
C
16
B
4
C
17
A
5
D
18
6
A
19
7
B
20
8
A
21
B
9
D
22
D
10
B
23
D
11
D
24
C
12
C
25
B
13
D