1. Ch 16, 2-4

2. Section 2: Aggregate supply the total value of goods and services that all firms would produce in a specific period of time.

3. Aggregate supply curve Shows the amount of real GDP that could be produced at various price levels. Uses label: AS

4. Aggregate demand the total quantity of goods and services consumed at different price levels

5. Aggregate demand curve graph showing the quantity of real GDP that would be purchased at each possible price level in the economy. Uses label: AD

6. Macroeconomic equilibrium The level of real GDP consistent with a given price level Determined by the intersection of the aggregate supply and aggregate demand curves. Allows us to : – analyze economic growth – analyze price stability – make economic predictions

7. Section 3: Fiscal policy federal government’s attempt to stabilize the economy through taxation and government spending.

8. Keynesian economics proposed by economist, John Maynard Keynes in 1936. To stimulate aggregate demand by using government spending to lower unemployment. Popular until the 1970s.

9. multiplier a change in investment spending will have a magnified effect on total spending. Reduced investment will result in job losses. Unemployed will spend less.

10. accelerator the change investment spending caused by a change in total spending Government + consumer

11. Automatic stabilizers programs that trigger benefits if the economy threatens income. Unemployment insurance Federal entitlement programs Progressive income tax

12. Unemployment insurance workers who lose their jobs through no fault of their own can collect benefits for a limited amount of time. Cannot be collected if a person quits their job.

13. Supply-side economics policies designed to stimulate output and lower unemployment. By increasing production rather than demand. Promoted by the Reagan administration Note: called “Reaganomics”

14. Laffer curve a hypothetical relationship between Federal tax rates and tax revenues

15. Monetarism government doctrine that places primary importance on money and its growth. Monetarists believe in policies that – lead to stable, long-term money growth At levels low enough to avoid inflation.

16. Wage-price controls regulations that make it illegal for businesses to give workers raises Without explicit permission of the government Attempted by Richard Nixon to deal with inflation. – His program failed.

17. Section 4 : Council of Economic Advisors a three-member group that reports on economic developments and proposes strategies to the US president. Gathers information Makes recommendations

18. Assessments: section 2, Checking for Understanding 1 Increased spending Expectations about future conditions Increased transfer payments Decreased taxes

19. 3 Aggregate supply is the total value of goods and services that all firms would produce at a specific period of time at various price levels.

20. 4 It is the total quantity of goods and services demanded at different price levels

21. 5 Level of GDP consistent with a price level

22. Assessments: Section 3, Checking for Understanding 1 Supply-siders advocate smaller role

23. 3 To achieve steady economic growth by affecting aggregate demand

24. 4 Lower taxes and less government will raise production and unemployment

25. 5 Causes inflation in the long-term

26. Assessments: Section 4, Checking for Understanding 1 Discretionary is chosen Automatic is self-acting

27. 3 To promote economic growth and price stability By controlling the amount of money in circulation – To control inflation Monetary policy may increase interest rates – Politicians do NOT want higher rates.

28. 4 They view different problems as most critical. Different time periods face different problems.

29. 5 Politicians are concerned with the economic consequences of what they do.

30. 6 Image, p. 443 What causes a decrease in aggregate supply? Any factors that tend to increase the cost of production for an individual firm.

31. 6 Image, p. 444 What causes the aggregate demand curve to shift? The amount of money people save Taxes Transfer payments

32. 6 Image, p. 445 What happens to the price level when output increases? The price level will increase

33. 12 Image, p. 448 What is the role of government deficits according to Keynesian theory? Government deficits are unfortunate, but necessary To stop further declines in economic activity

34. 12 Image, p. 449 Which point on the graph represents the lowest aggregate demand? Point a

35. 12 Image, p. 450 How does the role of government differ under supply-side and demand-side policies? Under supply-side there is less government intervention and lower taxes. Note: there is no guarantee that the main benefactors, the wealthiest 1-2% will share anything with or create jobs for the middle and lower classes.

36. 12 Image, p. 451 What happened to tax revenues after taxes were raised in 1986? revenues went up

37. 12 Image, p. 452 What happens to the price level when the aggregate supply curve shifts to the right? Price levels go down