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Aggregate Demand

The Total quantity of output demanded at alternative price levels in a given time period

Aggregate Supply

The total quantity of output producers are willing and able to supply at alternative price levels in a given time period

Equilibrium (macro)

The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.

Income transfers

Payments to individuals for which no current good or services are exhanged such as social security and welfare

Alter Aggregate demand by:

1. purchasing more or fewer goods and services.
2. Raising or lowering taxes
3. Changing the level of income transfers

Fiscal Policy

The use of Government taxes and spending to alter macroeconomic outcomes.

The Federal budget is a tool that can shift aggregate demand and thereby:

alter macroeconomic outcomes

Keynesian Perspective:

get someone to spend more on good and services

Fiscal Stimulus

Tax cuts or spending hikes intended to increase aggregate demand.

Aggregate Supply

The total quantity of output producers are willing and able to supply at alternative price levels in a given time period.

Rightward AD shift equal to the real GDP gap will leave the economy:

Short of full employment

When AD curve shifts to the right, the economy moves up the aggregate supply cruve, not:

Horizontally to the right. as a result both real output and the price level change.

As teh curve slopes upward, we must increase:

Aggregate demand by more than the size of the recessionary GDP gap in order to achieve full employment.

AD Shortfall

The amount of additional aggregate demand needed to
achieve full employment after allowing for price-level changes.

What is a form of fiscal stimulus?

Increased government spending.

Every dollar of new government spending:

has a multiplier impact on aggregate demand.


The fraction of each additioanl dollar of disposable income spent on consumption; teh change in consumpotion divided by the change in disposable income.

The impact of fiscal stimulus on AD includes both:

New govt. spending and all subsequent increases in consumer spending triggered by multiplier effects.

Disposable Income

After-tax income of consumers; personal income less personal taxes.

the efect of a tax cut that increase disposable income

is to stimulate consumer spending.

Intial Fiscal stimulus (AD shift) of increased transfer payment is

Injection= MPC X increase in transfer payments

Inflationary GDP gap

The amount by which equilibrium GDP exceeds full-employment GDP.

Budget cuts

should equal the size of the desired fiscal restraint.

Traxes must be increased

more than a dollar to get a dollar of fiscal restraint.

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