Unit 3 March 6

• Fiscal policy 
• Changes in spending 
• 2 tools of fiscal policy 
• taxes- government can increase or decrease takes 
• spending- government can increase or decrease 
• fiscal policy is enacted to promote our nations economic goals: full employment, price stability, economic growth
• Deficits, surplus and debt
• balanced budget 
• revenues = expenditures
• Budget deficit
• revenues < expenditures
• Budget surplus
• Revenues > expenditures
• Government must borrow money when its runs a budget deficit 
• individuals
• Corporations
• Financial institutions
• foreign entities or foreign government 
• Fiscal policy two options 
• Discretionary fiscal policy ( Congress )
• Expansionary fiscal policy- think deficit
• Contractionary fiscal policy- Surplus
• Non-Discretionary fiscal policy ( no action )
• Three types of taxes
• Progressive tax- takes a larger percent from higher income group
• Proportional taxes ( flat rate )-takes the same percent of income from all income groups
• Regressive taxes- takes a longer percentage from low income groups
• Contractionary fiscal policy ( the brake )
• law that reduce inflation, decrease GDP ( close a inflationary GDP )
• Decrease government spending 
• tax increase 
• combination of the two 
• Expansionary fiscal policy ( the gas )
• laws that reduce unemployment and increase GDP ( close a recessionary gap ) 
• increase government spending 
• decrease taxes on consumer
• combination of the two 
• Automatic or built in stabilizers 
• anything that increase the government budget deficit during a recession and increase its budget surplus during inflation without requiring explicit action by policymakers 
• Transfer payment 
• Welfare checks
• food stamps
• unemployment checks
• corporate dividends
• social security 
• veterans benefits 
  

Unit 3 February 29

• Classical School 
• Trickle down theory
• help the rich first and then everyone else 
• in the LR, the economy will balance at full employment output 
• the invisible hand 
• Keynesian School
• AD is the key, not AS
• in the LR, we are dead 
• leaks cause recessions
• savings cause recession 

Unit 3 February 27

• Reason why prices tend to be Sticky or inflexible in a demand direction
• Fear of price war
• Wage control 
• Menu cost
• Moral effort and productivity 
• Range 1 ( Horizontal Range )
• output is low relative to the economies fully outpt
• Unemployment increases and so does GDPr
• Range 2 ( Intermediate Range )
• output expands as spending increases 
• Range 3 ( Vertical/ Classical range )
• In the long run the aggregate supply curve is vertical, because the only effect of increase of AD when we are already at full employment an increase in the price level 
• Firms can respond to increase in demand by increasing output 

Unit 3 February 24

• The spending multiplier effect
• An initial change in spending ( C, Ig, Xn ) causes a larger change in aggregate spending or aggregate demand
• Multiplier = Change in AD/ Change in spending 
• Multiplier = Change in AD/ Change in C, Ig or Xn
• Why does this happen 
• Expenditure and income flow continously which sets off a spending increase in the economy 
• Calculating the spending multiplier 
• The spending multiplier can be calculated from the MPC or MPS
• Multiplier = 1/1-MPC or 1/MPS
• Multipliers are ( + ) when there is an increase in spending and ( - ) when there is an decrease 
• When government taxes, and the multiplier works in reverse 
• because now is leaving the circular flow 
• Tax multiplier ( its negative )
• -MPC/1-MPC or -MPC/MPS
• if there is a tax cut, then the multiplier is +, because there is now more money in the circular flow 

Unit 3 February 23

• Consumption and Savings
• Household Spending 
• The ability to consume is constrained by 
• The amount of disposable income 
• The propensity to save 
• Do households consume if DI = 0
• Autonomous Consumption
• Dissavings 
• APC = C/DI = % DI that is spent 
• Savings
• 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
• APS = S/DI = % of DI that is not spent 
• APC and APS
• APC + APS = 1
• 1 - APC = APS
• 1- APS = APC
• ADC > 1: Dissavings 
• -APS : Dissavings 
• MPC and MPS
  
• Marginal propensity to consume 
• Change in C/ Change in DI
• % of every extra dollar earned that is spent 
• Marginal propensity to save 
• Change in S/ Change in DI
• % of every extra dollar earned that is saved 
• MPC + MPS = 1
• 1-MPC = MPS
• 1-MPS = MPC
• Determinants of C and S
• Wealth 
• Expectation
• Household debt 
• Taxes

Unit 3 February 21

• What is investment
• money spent or expenditures on
• new parts ( factories )
• Capital equipment ( Machinery )
• Technology ( hardware and software )
• New homes 
• Inventories
• Expected rate of return
• How does business make investment decisions
• cost/ benefit analysis
• How does business determine the benefit 
• expected rate of return 
• How does business count the cost 
• Interest costs
• How does business determine the amount of investment they undertake 
• How do you compute the real interest rate (r%) - r% = i% - 𝚷% ( real GDP = Nominal GDP -Inflation)
• What then, determines the cost of an investment 
• What is the slope of the investment demand curve
• Downward Sloping 
• Why
• when interest rates are high, fewer investment are profitable; when interest rates are low, more investment
• Shift in investment demand
• Cost of production
• Business taxes 
• Technological 
• Stock of capital 
• Expectations
• Aggregate Supply- The level of real GDP (GDPr) that firms will produce at each price level
  
• Long- Run Vs. Short- Run
• Long Run- Period of time where input prices are completly flexible and adjust to changes in price level
• The long run, the 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 short run, 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 level of full employment in the economy 
  
• Short-Run Aggregate supply (SRAS)
• Because input prices are sticky in the short-Run, the SRAS is upward sloping 
  
• Changes in SRAS
• An increase in SRAS is seen as a shift to the right 
• A decrease in SRAS is seen as a shift to the left 
• The key to understanding shift in SRAS is per unit cost of production
• Per unit production cost = Total input / Total output cost 
• Determinants of SRAS
• input prices 
• productivity 
• Institutional Environment
• input rices - domestic resource rate 
• wages ( 75% of all business costs )
• Cost of capital 
• Raw materials ( Commodity prices )
• foreign resource prices
• strong money = lower foreign prices
• Weak money = Higher foreign resource prices 
• Market power 
• monopolies and cartels that control resources control the prices of the resources
• increase in resource prices = SRAS shift right 
• Decrease in resource prices = SRAS shift left 
• More productivity = lower units production  cost = SRAS shift left
• Lower productivity = higher unit production cost = SRAS shift right 
• legal- institutional environment
• taxes and subsides
• taxes ( money to government ) on business increase per unit production cost = SRAS shift left
• Subsides ( money from government ) to business reduced per unit production cost = SRAS shift right 
• Government Regulation
• Government regulation creates a set of compliance = SRAS shift left
• Deregulation reduces compliance cost = SRAS shift right 
• 
  

Unit 3 February 16

• Determinants of AD
• Consumption (c)
• Gross private Investment (Ig)
• Government Spending (G)
• Net exports (Xn) = Exports - Imports (X-M)
• Change in consumer spending 
• Consumer wealth (Boom in stock market)
• Consumer Expectations (people fear a recession)
• Household indebtedness ( more consumer debt)
• Taxes (decrease in income taxes)
• Change in investment spending 
• Real interests rates (price borrowing money)
• Future Businesses expectations ( high expectations )
• Productivity and technology (new robots )
• Business taxes 
• Change in Government spending
• war 
• Nationalized health care
• Decrease in defense spending 
• Change in net exports (X-M)
• Exchange rates
• if U.S. dollar depreciates relative to the euro
• National Income compared to abroad 
• if a major importer has a recession 
• if the U.S. has a recession
• AD = GDP = C + Ig + G + Xn
• Government Spending 
• more government spending ( AD Shifts right )
• Less government spending  ( AD shifts left )

Unit 3 February 17

• Aggregate Demand Curve
• AD is the demand by consumes, business, government and foreign countries
• Changes in price level cause a move along the curve not a shift of the curve
• AD= C + I + G + Xn
• A multiplier effect that produces a greater change than the original change in the 4 components
• increase in AD = AD shift to the right