1. Unit-3 Macro Review Consumption, Saving & AD/AS Model

2. Disposable Income (DI) Disposable Income (DI) = Gross Income – Net Taxes DI = Consumption + Savings (assuming no Gov’t taxes or transfers) MPC + MPS = 1

3. 3 Multipliers 1) Gov’t Spending or Investment Multiplier = –1/MPS –1/.20 = 5 2) Tax Multiplier : –- MPC/MPS –-.80/.20 = -4 MPC =.80 MPS =.20 Tax Multiplier is always 1 smaller 3) Balanced Budget Multiplier is always = 1

4. Real GDP Price Level 0 AD P Y Y2Y2 P2P2 1. A decrease in the price level... 2.... increases the quantity of goods and services demanded. Aggregate Demand C urve 3-Factors make it downward sloping AD = C + I + G + NX

5. AGGREGATE SUPPLY 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

6. Shifts in AS Shifts occur when you have a change in: –Expected Price Level –Input Prices –Labor –Capital –Natural resources –Technology –Gov’t Incentives Will shift BOTH curves (LRAS & SRAS) Shift SRAS but not LRAS

7. Price Level Real GDP Y1Y1 LRAS 1 LRAS 2 Goal of an Economy: Shift LRAS Right PPF Graph Y2Y2 Technology allowed USA to maintain high GDP & low inflation in 1980’s & 1990’s

8. Price Level Real GDP Keynesian Range Intermediate Range AS Classical Range AD Economy is at Full Employment when AS turns Vertical

9. Practice Questions 1E14B 2C15B 3C16B 4C17A 5D18 6A19 7B20 8A21B 9D22D 10B23D 11D24C 12C25B 13D

10. Consumption Function Slope of consumption function = MPC = ∆C / ∆ DI Slope of savings function = MPS = ∆S / ∆ DI Autonomous Consumption: ↓ C = 40 +.75 (DI) Except for taxes & transfers, Savings & Consumption Functions shift in opposite directions