Christian's AP Macroeconomics Blog

Fiscal Policy - Changes in the expenditures or tax revenues of the federal government. Controlled by government (Congress, President) 2 Tools of Fiscal Policy Taxes: Government can increase or decrease taxes. Spending: Government can increase or decrease spending. -Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth Deficits, Surpluses, and Debt Balanced Budget Revenues = Expenditures Budget Deficit Revenues < Expenditures Budget Surplus Revenues > Expenditures Government Debt Sum of all deficits - Sum of all surpluses Government must borrow money when it runs a budget deficit. Government borrow from: Individuals Corporations Financial institutions Foreign entities or foreign government Fiscal Policy Two Options Discretionary Fiscal Policy (action) Expansionary Fiscal Policy- Think deficit Contractionary Fiscal Policy- Think surplus Non-Discretionary Fiscal Policy (no ...

Disposable Income (DI) - Income after taxes or net income 2 Choices With DI, households can either: Consume (Spend $ on goods and services) Save (Not spend $ on goods and services) Consumption Household spending The ability to consume is constrained by The amount of DI The propensity to save Do households consume if DI ≠ 0? Autonomous consumption Dis-saving Saving Household NOT spending The ability to save is constrained by The amount of DI The prosperity to consume Do households save if DI ≠ 0? NO APC & APS Average Propensity to Consume and Average Propensity to Save APC + APS = 1 1 - APC = APS 1- APS = APC APC > 1 (Dissaving) -APS (Dissaving) MPC & MPS Marginal Propensity to Consume (MPC)  ∆C / ∆ DI % of every dollar earned that is spent Marginal Propensity to Save (MPS) ∆S / ∆DI % of every extra dollar that is saved. MPC + MPS = 1 1 - MPC = MPS 1 - MPS = MPC Marginal Propensity to Consume (MPC) M...

Investment - Money spent or expenditures on: New plants (factories) Capital equipment (machinery) Technology (hardware and software) New homes Inventories (goods sold by producers) Expected Rates of Return How does business make investment decisions? Cost/Benefit analysis How does business determine the benefits? Expected rate of return How does business count the cost? Interest costs How does business determine the amount of investment they undertake? Compare expected rate of return to interest rate If expected return > interest cost, then invest If expected return < interest cost, then don't invest Real Interest Rate (r%) v. Nominal Interest Rate (i%) What's the difference? Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known for ex post factor. How do you compute the real interest rate (r%)? r% = i% - π% What determines the cost of an investment decision? The real interest rate (r%) ...

The  AS/AD model  shows that the equilibrium of AS and AD determines the current output (real GDP) and the price level. Full employment:  equilibrium exists where AD intersects SRAS and LRAS at the same point Recessionary gap:  exists when equilibrium occurs below full-employment output An  inflationary gap  exists when equilibrium occurs beyond full employment output . Three ranges of SRAS :  Keynesian or horizontal range ,  intermediate range , and  classical or vertical range . Keynesian or horizontal range: recession or depression  not fully using all of our resources  below full employment. Intermediate-range: resources are getting closer to full employment levels, which creates upward pressure on wages and prices. Classical or vertical range   when real GDP is at a level below the full employment level where any increase in demand will result only in an increase in prices. ...

Aggregate supply (AS):  is the level of real GDP that firms will produce at each price level. Ways to measure: Long-run  is the period of time where input prices are completely flexible and adjust to changes in the price level. In the long-run, the level of real GDP supplied is independent of the price level. Short-run  is the period of time where input prices are sticky and don't adjust to changes in the price level. In the short-run, the level of real GDP supplied is directly related to the price level.  There are two types: long-run aggregate supply (LRAS) and short-run aggregate supply (SRAS). Long-run aggregate supply (LRAS): The long-run aggregate supply (LRAS) marks the level of full employment in the economy (analogous to production possibilities chart, or PPC).  Because input prices are completely flexible in the long-run, changes in price level don't change firms' real profits and therefore don't change firms' leve...

Aggregate demand (AD):  shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level. In other words, it is the demand by consumers, businesses, government, and foreign countries. Changes in price level cause a move along the curve, not a shift of the curve. The relationship between the price level and the level of real GDP is inverse. The formula for aggregate demand is  AD = C + Ig + G + Xn Aggregate demand is downward sloping, there are 3 reasons for that: Wealth Effect, Interest Rate Effect, and Foreign Trade Effect. Wealth Effect Higher prices reduce purchasing power of money This decreases the quantity of expenditures  Lower price levels increase purchasing power and increase expenditures Interest-Rate Effect As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans Higher interest rates discourage consumer spending and busi...

Unit II: Gross Domestic Product Gross domestic product/ GDP: total market value of all final goods and services produced within a country's borders within a given year. Gross national product/GNP:  a measure of what citizens produce and whether they produce these items within a country's borders. GDP has four parts and these four parts are used to calculate it. The "C" stands for personal consumption expenditures, which are finished goods or services. 67% of the economy is spent on this section. The " I g " stands for gross private domestic investment. 17% of the economy is spent on this section. There are four things fall in this section: factory equipment maintenance new factory equipment construction of housing unsold inventories or products built in a year The "G" stands for government purchases of goods and services 20% of the economy is spent on this section. The " X n " stands for net export wh...