No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How does the economy self-correct from inflation?

Posted on April 17, 2014 at 12:10 AM Comments comments (0)

If an economy is experiencing inflation in the short run, classical economists would say that the government should do nothing and the economy will correct itself in the long run. 

 

In the long run, workers will demand higher nominal wages, thus raising inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the left toward the long-run aggregate supply curve until the long-run equilibrium is achieved. The price level increases, real GDP decreases, and unemployment increases.

 

AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How does the economy self-correct from a recession?

Posted on April 17, 2014 at 12:05 AM Comments comments (0)

If an economy is experiencing a recession in the short run, classical economists would say that the government should do nothing and the economy will correct itself in the long run.


In the long run, workers will be forced to take nominal wage cuts, thus lowering inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the right toward the long-run aggregate supply curve until full employment is restored. The price level decreases, real GDP increases, and unemployment decreases.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is a contractionary fiscal policy?

Posted on April 17, 2014 at 12:00 AM Comments comments (0)

From the Keynesian economic perspective, a contractionary fiscal policy is appropriate if the economy is experiencing inflation in the short run. The government can decrease spending and/or increase income taxes to shift aggregate demand to the left. This will decrease real GDP, decrease the price level, and increase the unemployment rate.

 

This No Bull Review video explains the concept of a contractionary fiscal policy and shows you how to graph the policy using the AD/AS model.

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AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

What is an expansionary fiscal policy?

Posted on April 16, 2014 at 11:55 AM Comments comments (0)

From the Keynesian perspective, an expansionary fiscal policy is appropriate if the economy is experiencing a recession in the short run. The government can increase spending and/or decrease income taxes to shift aggregate demand to the right. This will increase real GDP, increase the price level, and decrease the unemployment rate.


This No Bull Review video explains the concept of an expansionary fiscal policy and shows you how to graph the policy using the AD/AS model.

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AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How do you graph an economy with inflation?

Posted on April 16, 2014 at 11:35 AM Comments comments (0)

To graph an economy experience inflation in the short run, the short-run aggregate supply curve and aggregate demand curve should intersect to the right of the long-run aggregate supply curve (full-employment level of output).


The No Bull Review diagram shows how to graph an economy experiencing high inflation in the short run using the AD/AS model.


AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

How do you graph an economy in recession?

Posted on April 16, 2014 at 11:30 AM Comments comments (0)

To graph an economy experiencing a recession in the short run, the short-run aggregate supply curve and aggregate demand curve should intersect to the left of the long-run aggregate supply curve (full-employment level of output).


This No Bull Review diagram shows how to graph an economy in recession using the AD/AS model.


AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

How do you graph an economy at full employment?

Posted on April 16, 2014 at 11:25 AM Comments comments (0)

To graph an economy that is fully employed, use the aggregate demand and aggregate supply model. The short-run aggregate supply curve, long-run aggregate supply curve, and aggregate demand curve should all intersect at the same spot. Price Level should be labeled on the y-axis and Real GDP should be labeled on the x-axis.


This No Bull Review graph illustrates a fully employed economy using the AD/AS Model. This is also known as an economy's long run equilibrium.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is the tax multiplier?

Posted on April 14, 2014 at 7:55 PM Comments comments (0)

In the Keynesian model, the tax multiplier is -MPC/MPS. The tax multiplier is less than the spending multiplier because this formula accounts for savings, which is a leakage. Leakages are not directly used for spending in the short run.


If there is an increase in taxes, multiply the negative tax mulitplier by the change in taxes to see the potential change in real GDP. If there is a decrease in taxes, do the same thing as before, but ignore the negative  sign to see the potential increase in real GDP.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How does the spending multiplier work?

Posted on April 14, 2014 at 7:50 PM Comments comments (0)

To calculate the spending multiplier, simply divide 1 by the marginal propensity to save (1/MPS or 1/1-MPC). Once you have the spending multiplier, multiply the change in spending by the spending multiplier. This is used within the Keynesian model.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is a budget deficit?

Posted on April 14, 2014 at 6:20 PM Comments comments (0)

A budget deficit occurs when the government spends more than it receives in tax revenue. The government must borrow (issue bonds) to finance its spending. This will often lead to the crowding out effect, a problem associated with expansionary fiscal policies.


A budget surplus occurs when the government receives more money in tax revenue than it spends.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is fiscal policy?

Posted on April 14, 2014 at 5:30 PM Comments comments (0)

Fiscal policy consists of government action which seeks to shift aggregate demand (and sometimes aggregate supply) to bring about full employment. The government does this primarily through changing its levels of spending and taxes.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is the national debt?

Posted on November 11, 2009 at 3:10 PM Comments comments (0)

The U.S. National Debt is the amount of outstanding dollars owed by the United States in the form of marketable and non-marketable securities (bonds).


To view the national debt visit this site: http://www.usdebtclock.org/


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy


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