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Unit 6 Understand the following terms and concepts: Determinants of AD & AS (what shifts each curve and how) Business cycle Recession Contraction Expansion Aggregate Demand C + Ig + G + Xn = AD Short-Run Aggregate Supply Long-Run Aggregate Supply (Potential Output) Demand-pull inflation Cost-put inflation Full Employment (natural rate of unemployment) Keynesian v. Classical economic theory Balanced Budget 2015 Multiplier Effect Non-discretionary policy (automatic stabilizers) Discretionary fiscal policy – expansionary v. contractionary Fiscal policy lags Budget Surplus Budget Deficits Standardized (Full-Employment) Deficit v. Cyclical Deficit Federal Debt Loanable funds market Real Interest Rate Crowding out effect Government Securities = bonds, bills, & notes Chapter 15.3 (Aggregate Demand & Aggregate Supply) Which determinants affect which curve(s) and how? o What are the results on PL and output following a curve shift? How does this model tie into fiscal policy? What is the principal difference between short-run aggregate supply and long-run aggregate supply? What can affect changes to the long-run aggregate supply curve? How are the LRAS curve and Production Possibilities Curve related? Chapter 14.2 & 15.1 (Federal Financing & Fiscal Policy) When long-run equilibrium is achieved, where is unemployment? What are the automatic stabilizers already built into our economy? How do they work in different phases of the business cycle to stabilize economy? What is a recessionary gap? o What fiscal tools can gov’t use to correct? What is an inflationary gap? How can the economy exceed its potential output? o What fiscal tools can gov’t use to correct? If fiscal policy is to be countercyclical, what would happen to the budget during a recession? What about during expansion or times of full-employment? What is the argument against a balanced-budget amendment? How does increased change in spending of one component of aggregate demand impact aggregate demand under the multiplier effect? What are the lags with regard to discretionary fiscal policy? What is the difference between a government deficit and the national debt? When the government deficit funds explain why they enter the loanable funds market….what is the effect of this on the real interest rate? What does the government do if it is going to run a deficit? How does it do this? How does Classical economic theory differ from “Keynesian” economists? – tie to model! Models you must know: *****AD & AS Model with all 3 curves (AD, SRAS, & LRAS) Loanable Funds Market Equations you must know: AD Per-unit production costs Federal Debt