midterm prep

• Aggregate demand (AD) curve

  Shifts $20 billion to the right when autonomous spending rises by $2 billion
• Multiplier

  Equal to 5 or 10 depending on the question
• Aggregate demand (AD) curve shifts right

  Increases the equilibrium price and quantity
• Government activities


  • Affect aggregate demand through purchases of goods and services
  • Making transfer payments to individuals
• Austerity plans in the UK that cut government expenditure on education, health care and public servants
• Factors that can lessen the negative impact of spending cuts on GDP

  • Low rate of induced expenditure (AAE/AY)
  • Low marginal propensity to import
  • Lump sum or constant tax system
• Government decreases autonomous spending and autonomous taxes by $100 billion

  No effect on the level of GDP
• Expenditure multiplier

  Value of 2, 3.5, 2.5 or 3 depending on the marginal propensity to consume and import
• GDP = $5,000, C = $3,000, G = $1,200, NX = -$800
• Value of investment (I) is $1,200, $1,600, $1,000 or $1,400 depending on the question
• Saving

  Equal to investment when Y=AE
• During the 2009-2010 recession, Canada's actual real GDP was higher than potential GDP and actual unemployment rate was higher than the natural rate
• Population of Mars is 6,430, with 4,750 employed, 500 unemployed, and 300 not in the labor force
• Fiscal policy and monetary policy

  • Can change aggregate demand to eliminate output gaps
• With negative GDP gap of 20%, the budget balance is -20
• The structural budget balance is 20
• With negative GDP gap, the structural budget balance will be larger than 20
• There will be zero budget balance when Y is 900
• Y>AE

  Unplanned inventory increases and the price level increases
• Actual (observed) government balance

  Depends on the net tax rates set by the government, government expenditures on goods and services, and the actual level of nominal GDP
• Expenditure-based GDP

  Measured as C+I+G+ Exports - Imports
• Economic growth


  Measured as the percentage change in real GDP
• Structural budget balance


  Evaluates the budget balance when the economy is at potential GDP
• Canada's natural unemployment rate is around 5%, not 10%
• Canada's real GDP growth rate in 2011 was around 2.5%
• Canada experienced an economic recession in 2009
• Canada's Finance Minister in 2012 was Jim Flaherty, not James Flaherty
• Higher price level

  Leads to a decrease in exports and an increase in imports
• Fall in short run output

  Corresponds to the AS shifting down
• If the nominal wage rate is $12 per hour and the CPI increases from 135 to 162, the nominal wage that maintains a constant real wage is $15.24
• Marginal propensity to consume (mpc)

  0.75 out of disposable income (YD)
• Marginal propensity to spend (mpe)

  0.64 out of national income (Y)
• Aggregate demand exceeds potential output


  Inputs are over-employed and the price level will rise
• Aggregate demand exceeding potential output

  Eventually the AS will shift to bring the actual Y back to Yp, leading to a higher price level in the long run
• Marginal propensity to consume (mpc) and marginal propensity to import (mpm)

  Equal to 0.8
• Goods market multiplier


  Value of 3 when the slope of the AE function is 0.75
• Cutting income tax rates during a recession is an example of discretionary fiscal policy
• Economies with lower income tax rates t will experience larger business cycle fluctuations in real GDP and employment
• Potential output Yp changes when the size of the labour force changes
• Inflation rates can be positive, negative or zero, and they capture persistent changes in the general price level