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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