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Aggregate Demand:
the total amount of a product that will be bought at a certain price level
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Real Balances Effect
higher price levels mean less consumption spending
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Interest Rate Effect
increased demand for prices and the interest rate, increase price level reduces the amount of products demanded
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Foreign Purchases Effect
increase in price and decrease in quantity of U.S. goods demanded as net exports
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Aggregate Supply Curve
reflects what happens to the per unit production cost as GDP expands/contracts
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Parts of Aggregate Supply Curve
Horizontal range (econ in recession), intermediate range, vertical range (econ reaches full capacity)
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Fiscal Policy
deliberate changes in government spending and tax collections to achieve employment, control inflation, and encourage economic growth
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Employment Act of 1946
Committed the federal government to providing job opportunities and maintaining economic stability
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Budget Surplus
tax revenues in excess of government spending
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Two Ways the Govt Finances a Deficit
- - borrowing from the public
- - money creation
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How to Reduce Debt
- - govt buys bonds
- - impounding
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Net Taxes
Tax revenues - transfers & subsidies
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Built in Stabilizer
Anything that increases the govts budget deficit during a recession and increases budget surplus during inflation
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Progressive Tax System
The average tax rate goes up with GDP
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Regressive Tax System
average tax rate decreases as GDP rises
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The more progressive the tax system the higher the stability.
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Full-Employment Budget (Standardized Budget)
Used to adjust the actual federal budget deficits/surpluses to eliminate the automatic changes to tax revenues
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Three Problems of in Determining Fiscal Policy
Recognition lag, administrative lag, and operational lag.
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Political Business Cycle
when politicians manipulate fiscal policy to maximize voter support, even though their fiscal decisions destabilize the economy
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Crowding Out Effect
deficit spending increases interest rate and reduces private spending and weakens/cancels out stimulus of expansionary policy
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Two Parts of Net Export Effect
Expansionary Fiscal Policy and Contractionary Fiscal Policy
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Expansionary Fiscal Policy
decrease in net exports
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Contractionary Fiscal Policy
increase in net exports
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Supply Side Fiscal Policy
as taxes decrease the aggregate supply curve shifts right which negates inflation and increases economic growth
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Three Reasons for Supply Side Economics
- - savings/investments
- - work incentives
- - risk taking
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