Bernard 's AP Macroeconomics Blog

Changes in the expenditures or tax revenues of the federal government 2 tools of fiscal policy Taxes: government can increase or decrease taxes Spending: government can increase or decrease If government increase taxes then they decrease spending and vice versa depending on if recession or not. If in recession then spend money  Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economy grown Deficits, Surplus, 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 from Individuals (taxes) Corporations (taxes) Financial institutions foreign entities or foreign governments Fiscal Policy Two Options Discretionary Fiscal Policy (ACTION) Expansionary Fiscal Policy - think defi

Disposable Income (DI) Income after taxes or net income (take home) What you have left over after you've payed all your bills 2 Choices With disposable income, households can either Consume (spend money on goods and services) Save (not spend money on goods and services) Consumption Household spending The ability to consume is constrained by The amount of disposable income  The propensity to save Do households consume is DI = 0?? Autonomous consumption Dissaving Saving Household NOT spending The ability to save is constrained by The amount of disposable income The  propensity to consume Do households save if DI = 0? NO APC % APS (average propensity to consume and average propensity to save) APC + APS = 1 1 - APS = APC 1 - APC = APS APC > 1 is Dissaving -APS is Dissaving MPC & MPS (Marginal propensity to consume and marginal propensity to save) Marginal propensity to Consume The fraction of any change in dispo

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 cost If expected return > interest cost then invest If expected return < interest cost then do not invest  Real(r%) Nominal (i%) What's the difference?? Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known ex. post facto How do you compute the real interest rate (r%) r% = i% - π% What then, determines the cost of an investment decision? The real interest rate (r%) Investment Demand Curve

The equilibrium of AS &AD determines current output (GDPr) and the price level Full employment - equilibrium exists where AD intersects SRAS & LRAS at the same point  Recessionary Gap- a recessionary gap exists when equilibrium occurs full employment output. Inflationary Gap- an inflationary gap exists when equilibrium occurs beyond full employment output  U% - unemployment 𝝅% - inflation  3 Ranges of AS   Keynesian of horizontal range Not fully using all of the resources Could be a recession or depression (not where need to be) below full employment  Intermediate Resources are getting closer to full employment, which creates upward pressure on wages and price  Classical or vertical range Real GDP is at a level with unemployment  at the full employment level where any increase in demand  will result only in an increase in prices Demand pull inflation (Always increasing ) Increase in price level resulting from increase in total

The level of Real GDP(GDPr) that firms will produce at each price level (PL) Long run v Short run  LR  - period of time where input prices are completely flexible and adjust to changes in the price level . in the price level of Real GDP supplied is independent of the price level. Short run - period of time where input prices are sticky and do not adjust to changes in the price level . In the SR the level of Real GDP supplied is directly related to the price level. Long run aggregate supply (LRAS)  The long-run aggregate supply or LRAS marks the levels of full employment in the economy (analogs to ppc) Because input prices are completely flexible in the long-run , changes in price level do not change firms real profits and therefore do not change firms level of output. This means that the LRAS is vertical at the economy's level of full employment. Changes in SRAS An increase in SRAS is seen as a shift to the right . SRAS → A decrease in SRAS is se

AD- is the demanded by consumers , business , government ,and foreign countries  AD=C+Ig+G+Xn Changes in price level cause a move along the curve not a shift on the curve. 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 the price level and the level of real GDP is inverse. 3 Reasons why is AD downward sloping Wealth Effect  Higher prices reduce purchasing power of $ This decreases the quantity of expenditures  Lower price levels increase purchasing power and increase expenditures  (Ex.If the balance in your balance in your bank was $50k , but inflation erodes ) 2.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 business investment . (Ex. Increase in prices leads to an increase in the int