Bianca A

 Changes in the expenditures or tax revenues of the federal government. 2 tools include: 1) Taxes- government can increase or decrease taxes 2) Spending - government can increase or decrease spending Fiscal Policy is enacted to promote our nations economic goods, full employmen, price stability, and 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 borrows money from: - individuals (taxes) - corporations - financial institutions - foreign entitles or governments Fiscal policy (Two options): Discretionary fiscal policy - think deficit - contractionsry policy - think surplus Non-discretionary fiscal policy(no action) Government (congress/president) is in control of fiscal policy Discretionary ...

Disposable income (DI) Income after taxes or net income DI = Cross Income - Taxes Two Choices: with disposable income, households can either... Consume (spend $) Save (not spend $) Consumption  Household spending Constrained by:  Amount of DI The propensity to save Do households consume DI = 0?  Autonomous consumption Dissaving Savings  households NOT spending Constrained by: Amount of DI Propensity to save Do households consume DI = 0?  No APC & APS "APC" means average propensity to consume. "APS" means average propensity to save. APC + APS = 1 1 - APC = APS 1 - APS = APC APC > 1 change dissaving - APC change dissaving MPC & MPS "MPC" means marginal propensity to consume The fraction of any change in disposable income that is consumed.  mpc = change in consumption / change in disposable income mpc  => C/ DI % of every extara dollar earned that is spent "M...

Investment is money spent or expenditures on: New Plants (factories) Capital Equipment's (machinery) Technology (hardware & software) New Homes Inventory (goods sold by producer) ex. Maytag Expected Rate of Returns:  How does a business make investment decisions? Cost/Benefit Analysis How does a business determine the benefits? Expected rate of returns  How does a business count the cost? Interest cost How does a business determine the amount of investment they undertake? compare expected rate of return to interest cost. If expected rate return > interest cost, then invest If expected rate return < interest cost, then DO NOT invest REAL(r%)  VS.  NOMINAL(i %) What then determines the cost of investment? The real interest rate. (r%) r% = i% - π% Investment Demand Curve (ID) Shape of demand curve? Downward slopping Why? When interest rates are increasing, fewer investments are profitable. When...

AS - AGGREGATE SUPPLY Aggregate Supply(AS) - The level of real GDP that firms will produce at each price-level.  There are two types: Long Run Aggregate Supply(LRAS) & Short Run Aggregate Supply(SRAS) LRAS- Period of time where input prices are completely flexible and adjust to changes in price level. In the long run, the level of real GDP is supplied independent of the price level. Marks the level of full employment in the economy Analogous to PPC  SRAS- Period of time where the input pries are sticky and DO NOT adjust to changes in the price level. In the short run, the level of real GDP is supplied directly related to the price level. Because the input prices are sticky in the short run, the SRAS is upward slopping. Changes in SRAS: Increase in SRAS, shifts right.(>>) Decrease in SRAS, shifts left(<<) Per unit production cost: The key to understanding shifts in SRAS is per unit cost of production. P.U.C.P = T...

 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. The relationship between real price level and GDP is inverse. AD: The demand by consumers, business, government, and foreign countries. Changes in the price causes a move along the curve, not the shift of the curve.           AD = C+I+IG+XN Three reasons for downward slope: Wealth Effect - Higher price reduces purchasing power of money. This decreases the quantity of expenditures. Lower price levels increases purchasing power and increase expenditures. (e. if the balance in your bank account was $50000 but inflation erodes your purchasing power, you will likely reduce your spending.  Interest-Rate Effect - As price level increases, lenders need to change higher interest rates to get real returns on their loans. Higher interest rates discourage consumer spending ...