Unit-3 Macro Review

1
Unit-3 Macro Review

• AD/AS Model Multipliers

2
Calculating GDP
GDP C I G (X-M)
What does not Count? Used
goods International products Financial
transactions Non-market transactions Govt
Transfers (i.e. welfare, social security)
What Counts? Only NEW FINAL
goods Domestic Products
GDP does not measure mix of goods, quality of
products, quality of life, leisure time
3
AD/AS Model

• Short run AS curve is upward sloping
• Prices/wages are sticky
• Long Run AS curve is vertical
• Prices/wages are flexible
• At full employment output level

4
AD Downward Slope
3-Factors make it downward sloping
Price
Level
Real GDP
0
5
Shifts in AS

• Shifts occur when you have a change in
• Expected Price Level
• Input Prices
• Labor
• Capital
• Natural resources
• Technology
• Govt Incentives

6
Inflationary Gap

• Recessionary Gap

Economy below full output
Unemployment high, output low Below PPF, Actual
Px level lt Expected
Unemployment very low, output high Above PPF,
Actual Px level gt Expected
7
Disposable Income MPS/MPC

• Disposable Income (DI) Gross Income Net
  Taxes
• DI Consumption Savings (assuming no Govt
  taxes or transfers)
• MPC MPS 1

8
3 Multipliers Fiscal Policy

• 1) Govt Spending or Investment Multiplier
• 1/MPS
• 1/.20 5
• 2) Tax Multiplier
• -MPC/MPS
• -.80/.20 -4

MPC .80 MPS .20

• Expansionary Fiscal Policy
• ? Govt Spending 1 billion
• MPS .25
• AD shifts right by 4 billion
• (multiplier 4)

3) Balanced Budget Multiplier is always 1
9
Goal of an Economy Shift LRAS Right
PPF Graph
Price Level
LRAS2
LRAS1
Technology allowed USA to maintain high GDP
low inflation in 1980s 1990s
Real GDP
Y1
Y2