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What are 2 assumptions to remember about the short run?
All prices and wages,interest rates and foreign exchanges are all FIXED
at these prices and wages, businesses produce the output that is demanded.
What is Aggregate Expenditure (AE)?
The total of all planned spending in the economy. This includes spending by households, investment expenditure by businesses and spending by people from other countries on our exports.
What is Disposable Income? and the formula
This is the total income received from businesses, plus transfer payments received from the government, minus direct taxes/net taxes paid to the government.
What is the consumption function formulae?
C = cY + C0
What is induced expenditure?
expenditure that is determined by national income levels. This is represented by cY in the consumption fomulae
How do you find the Marginal Propensity to Consume?
MPC = ChangeinC/ChangeinY
What is Saving?
Income that is not consumed
What's the Saving function formula?
S = -C0+(1-c)Y
What are autonomous in the expenditure based GDP?
Investment and Exports
What do exports depend on? (3)
- income levels in other countries
- price levels in those countries and
- the foreign exchange rate
What is the aggregate expenditure function?
the relationship between planned expenditure in the total economy and real national income or GDP
What are the two functions affected by the income level?
Consumption and Imports therefore
Change in AE = ChangeinC-ChangeinZ
What is the slope of AE?
Whats the formula for Ye?
Ye = A0/(1-c+z)
What are adjustments in output that move the economy to Ye?
they are unplanned changes in business inventories.
eg - if demand is high for a nike store and they want to sell more without being able to produce more they could bring out last seasons stuff
What happens to employment when Ye is less than Yp?
Employment is less than full, the unemployment rate is higher than the natural rate, the economy is in recession
What is the multiplier? and the formula
it's the ratio of the change in equilibrium output (Ye) to the change in autonomous expenditure (A0)
What are leakages? What are included in them
This is when parts of the national income are not passed on to businesses through expenditure on current goods and services. Savings, net taxes and imports are leakages
What are injections? what is included in them
this is when businesses receive money for goods and services that is not related to income levels. Autonomous investment, government spending and exports are injections.
What are transfer payments?
services like old age security and employment insurance benefits that the government provides citizens for free
What's the formula when (leakages = injections) at equilibrium
What are Net Taxes (NT)? Whats the formula
- Taxes minus transfer payments
- net taxes reduce disposable income (the amount of income available for spending or saving). so if we use t to indicate the net tx rate then
NT = tY
What is the Government Budget?
Reports government revenues and expenditures
this basically means what goods and services the government will buy during the year, what transfer payments it will make, and how it will pay for them.
- When revenues > spending = budget surplus
- revenues < Spending = budget deficit
- Revenues = spending = budget balanced
What is the formula for Budget Balance (BB)
BB = tY - G
Net Taxes minus gov spending
What are three things that the budget balance is determined by?
- 1. The net tax rate (t)
- 2. The level of spending (G) by the government
- 3. The level of output (Y) determined by AE and AD
What is Fiscal Policy?
government use of its taxes and spending to change real output
What are the main objectives of fiscal policy?
- 1 - Manage aggregate demand
- 2 - Keep output close to potential output
- 3 - Reduce size and duration of business cycle fluctuations (recessions and booms)
Using just the budget balance...
We can NOT tell the reason for a deficit or surplus
What is Structural Budget Balance (SBB)? Whats the formula?
Is the budget balance at potential output (Yp). It does not change whether there is a recession or boom (not affected by actual output).
SBB - tYp - G
What are Automatic Stabilizers?
they reduce changes in GDP caused by autonomous expenditure shocks. Basically, they reduce the size of the inflationary and recessionary gaps.
- - anything that lowers the multiplier is an automatic stabilizer.
- - income taxes and transfer payments are good examples
All _____ are automatic stabilizers
What is a Discretionary Fiscal Policy?
Policies that change taxes and government spending in response to changes in autonomous expenditure
What is Public Debt? Le formula?
Governments borrow money to finance (pay for) budget deficits by selling government bonds to households and businesses. The outstanding govt bonds issues to pay for government budget deficits.a
ChangeinPD = -BB
What is Net Public Debt?
the difference between the government's total debt and its financial assets. ex: stocks and bonds. The govt often owns financial assets like bonds that it earns interest on
What is Debt Ratio?
The ratio of public debt to GDP
What is Net Debt Ratio?
- The ratio of net public debt to GDP
- - When the debt ratio is high, the govt will need high tax rates to reduce the debt. this can lead to people not wanting to work and therefore spending less.