Aggregate Demand and Aggregate Supply/Fiscal Policy, Deficit, and Debt

Each video 3 bullet point sentence what you learned from the video .

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chapter 32 and Chapter 33

 

Answer the question using the videos and chapter . Short answer . Most answers are on the video
1. Explain expansionary fiscal policy, including when it should be used, what tools are used, and how those tools are used.

2. What is the difference between discretionary and non-discretionary fiscal policies?

3. List and explain how conservative and liberal political leanings believe government and personal choice should be done AND why?

4. Explain what the Laffer Curve is AND why it is important?

5. Explain contractionary fiscal policy, including when it should be used, what tools are used, and how those tools are used.

6. Calculate the deficit or surplus for each year using the following information:
Year Expenses Revenues Deficit/Surplus
1989 $900 billion $1.2 trillion
1990 $1.3 trillion $1.3 trillion
1991 $1.5 trillion $1.2 trillion
1992 $1.6 trillion $1.8 trillion
1993 $2.1 trillion $1.3 trillion

7. Using the deficit and surplus information in question 6 above, what is the debt in this country at the end of 1993?

8. Explain AND give an example of crowding out.

9. Explain and give an example of being able to manage the $29 trillion debt today.

10.  Explain why expansionary policy has a better chance of working than does contractionary policy.

11.  What would you use to nudge the economy away from the inflation zone and into the invisible hand zone AND why it probably not work.

Short Answer Questions:
12. Explain the four parts of the Aggregate Demand (AD) Curve.

 

13. Explain the three parts of the Short-Range Aggregate Supply (SRAS) Curve?

 

14. Explain the three ranges and their names of the Short-Range Aggregate Supply (SRAS) Curve.

 

15. Which curve, AD or SRAS, is easier to shift AND explain why?

 

16. Explain the four areas that will shift the AD curve.

 

17. Which of the four players in the Detailed Circular Flow Model will keep the economy in a recession AND explain why?

18. Which of the four players in the Detailed Circular Flow Model will keep the economy in inflation AND explain why?

 

19. Draw what a AD/AS model would look like if the economy is in inflation AND explain why.

 

20. Draw what a AD/AS model would look like if the economy is in recession AND explain why.

 

21.  Explain why the government should not interfere if the economy is in the invisible hand zone.

22. Why do you need to review both the productivity formula and the per unit cost formula before you make a decision concerning changing production method?

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Aggregate Demand and Aggregate Supply/Fiscal Policy, Deficit, and Debt

Bullets Points for each Video

AD1 Aggregate Demand Aggregate Supply Model – https://youtu.be/YX1r7AVAzE8

• The law of demand states that as price increases, demand for commodities decreases.
• The wealthy we become, the more we want.
• Consumer expectation and household indebtedness shift the AD curve to the right.

FP1 Policy pt1 https://youtu.be/P–QaNksdX0

• In real GDP, if prices are high, GDP will contract, and if prices are low, GDP will expand.

• In the case of the saving effect rate, when all things are held equal, spending will be less when prices go down, savings rise, and money lending goes up.
• If prices go down while other things are equal, the employment rate and peoples` optimism will also not change.

FP1 Policy pt2 https://youtu.be/2EOvOnu-Vsk

• In the case of aggregate demand, the business circle is irregular and unpredictable.
• Most macro variables fluctuate together in the case of aggregate demand.
• In aggregate demand real GDP is determined by factors like technology, imports, and workers, in the long run.

FP2 w AD AS Model https://youtu.be/euHZSMaIJoE

• There is an upward-sloping supply curve under aggregate supply in the short run.
• In the case of aggregate supply, it’s not the maximum productivity of the economy in the long run. Instead, it’s actual natural output.
• If the prices go up, the whole economy will produce beyond the natural rate.

FP3 Budget https://youtu.be/uUW4wBTfAYs

• Short-run aggregate supply is determined by the cost of production like wages, raw materials, business taxes, import prices, among others.
• When SRAS shifts to the left, we get a negative cost of production and vice versa.
• Production efficiency under short-run aggregate supply comprises labor productivity, investment, infrastructure, among others.

FP4 Social Security Paper https://youtu.be/XNVi8Ms4BEk

• In the government budget, it can borrow money or impose taxes if they need more money.
• There is some theoretical level of output in the long-run aggregate supply.
• Aggregate demand does not only involve the demand of one product but that of everything in the economy.

Questions and Answers

1. Explain expansionary fiscal policy, including when it should be used, what tools are used, and how those tools are used.

It is a policy designed to raise the aggregate demand and increase the GDP as a result of an increase in government spending, reduction of tax, or both. It is used during a recession to stimulate the economy. Expansionary fiscal policy boosts aggregate demand that helps in increasing employment and the economic output. Tools that are used include Reserve requirements, open market operations, and interest rates.

2. What is the difference between discretionary and non-discretionary fiscal policies?

Discretionary fiscal policy involves action taken when there is a problem to alter the economic movement, whereas Non-discretionary is that set of policies built into the system to stabilize the economy when growth is too low or too fast.

3. List and explain how conservative and liberal political leanings believe government and personal choice should be made AND why?

• By enhancing liberalism to enable individuals to receive equal treatment by the law regardless of their social status, sex, or race.
• By protecting citizens’ lives, property, and liberty. This is done to give everyone a liberal right to the free market and capitalism as well.

4. Explain what the Laffer Curve is AND why it is important?

The Laffer Curve shows the relationship between tax rates and the amount of tax revenue that the government collects. The curve is important as it is used to explain the argument that cutting tax rates can result in increased total tax revenue at times.

5. Explain contractionary fiscal policy, including when it should be used, what tools are used, and how those tools are used.

Contractionary fiscal policy is a policy where the government either raises taxes or cuts spending. It is used when an economy is producing above its potential GDP. Tools use here include increasing bank reserve requirements, selling government securities, and increasing interest rates (discount rate). Short term interest-rates, reserve requirements, and open market operations are also other tools that can be considered. They are used to increase the short-term interest rate (discount rate) to reduce the monetary supply. They also raise the reserve requirements to reduce the money supply in the economy by the central bank.

6. Calculate the deficit or surplus for each year using the following information: Year

Year	Expenses	Revenues	Deficit/Surplus
1989	$900 billion	$1.2 trillion	$300 billion
1990	$1.3 trillion	$1.3 trillion	0
1991	$1.5 trillion	$1.2 trillion	$-300 deficit
1992	$1.6 trillion	$1.8 trillion	$200 billion
1993	$2.1 trillion	$1.3 trillion	$ -800 billion

7. Using the deficit and surplus information in question 6 above, what was the debt in this country at the end of 1993?

Debt = surplus – deficit

Surplus = $300+$ 200 billion = $500 billion

Deficit = ($-300+-800) = 1.1 trillion

Debt = $500 billion- $1.1 trillion=$ -600 billion (deficit)

Debt = $-600 billion.

8. Explain AND give an example of crowding out.

Crowding out is an economic theory that states that the initial private investment spending decreases with the rise of interest rates. Examples of crowding out are include increase in tax, increase in borrowing, physical, fiscal, and financial.

9. Explain and give an example of being able to manage the $29 trillion debt today.

Concerning government debts, governments normally issue bonds while borrowing money. This allows them to avoid increasing taxes and provides money to pay for expenditures. Additionally, government often raises taxes to pay for expenditures. These taxes may include local income and business tax, state tax, sin taxes, and federal taxes.

10. Explain why the expansionary policy has a better chance of working than does the contractionary policy.

Expansionary policy targets the expansion of money supply. The policy expands profitability, contrary to contractionary policy. It brings a high demand for goods and services than the contractionary policy.

11. What would you use to nudge the economy away from the inflation zone and into the invisible hand zone, AND why does it probably not work.

I would increase reserve requirements on the money that banks normally keep on hand for recovering withdrawals. I would also reduce the supply of money through policies that encourage the decrease of the money supply. Furthermore, I would reduce the money supply within an economy through decreased bond prices or increased interest rates by use of the monetary policy. These are viable choices that have been proposed but do not work because they are hard, unethical, and almost impossible to implement. Nudges allow the government to overextend control on people’s behaviors, hence considered unethical. Besides, people’s freedom of choice is not affected by changing residents’ choice architectures.

Short Answer Questions

12. Explain the four parts of the Aggregate Demand (AD) Curve.

1. Consumption (C) – is the amount of consumer spending accomplished in an economy.
2. Government spending (G) – is the final consumption by the general government. It may include social services, education, military, among others.
3. Investment (I) – is the gross domestic fixed capital formulation. It is the money that firms spend on capital investment like; factories, stocks, and machineries.

1. Net export (NX) – is the sale of goods to foreign countries that is subtracted by the purchase of goods from other countries (X-M).
   13. Explain the three parts of the Short-Range Aggregate Supply (SRAS) Curve?

The three parts include;

1. The Keynesian zone – is the equilibrium level of real GDP that appears far below potential GDP. At this point the economy is in recession, and cyclical unemployment is high.
2. The neoclassical zone –  is the near-vertical portion on the right-hand side the equilibrium that is near potential GDP. In this economy, there is low cyclical unemployment, although structural unemployment may remain an issue.
3. The intermediate zone – is the point where AD curve crosses the SRAS curve at an equilibrium. It is associated with unemployment and inflation moving in opposing directions.

14. Explain the three ranges and their names of the Short-Range Aggregate Supply (SRAS) Curve

1. The keynesian short name is the aggregate supply
2. The intermediate zone is the long-run aggregate supply.
3. Classical zone- medium-run aggregate supply

15. Which curve, AD or SRAS, is easier to shift AND explain why?

The AD curve is easier to shift because it usually shifts right due to constant factors like, changes in expectations, changes in foreign income, and changes in exchange rates. SRAS, on the other hand, involves a series of shifts.

16. Explain the four areas that will shift the AD curve

1. Investment spending – it constitutes the money spent on capital goods, or goods used in producing of goods, capital, or services. They may include purchases like production inputs, machinery, land, or infrastructure.
2. Imports and exports – Exports includes sales of products and services made or sourced in the home country in foreign countries. Imports include goods and services bought from foreign sources and brought to the home country.

• Government spending – defines the money spent by the public sector to provide services like healthcare, education, defense, and social protection, and acquire goods.

1. Consumer spending – it defines household and personal expenditure on final goods and services for personal use and enjoyment in an economy.
   17. Which of the four players in the Detailed Circular Flow Model will keep the economy in a recession AND explain why?

Government spending- it is the government spending that will cause wage-price control, high-interest rates, among other factors.

18. Which of the four players in the Detailed Circular Flow Model will keep the economy in inflation AND explain why?

Consumer spending. Demand-pull and cost-push are the major causes of inflation. It is due to this that consumers will continue spending over time.

19. Draw what an AD/AS model would look like if the economy is in inflationAND explain why.

Figure 1: AD/AS if the economy is in inflation.

This model shows the economy under inflation since it provides an overview framework for bringing economic factors together in one diagram.

20. Draw what an AD/AS model would look like if the economy is in recession AND explain why.

 

Figure 2. AD/AS model if the economy is in recession.

The reason for this model is given by the rise in productivity that causes the AS curve to shift to the right.

21. Explain why the government should not interfere if the economy is in the invisible hand zone.

It is because government interference denies the citizens the benefits of the free market.

22. Why do you need to review both the productivity formula and the per-unit cost formula before you make a decision concerning changing the production method? 

The review gives room for the estimation of monetary value and allows the maxim rule, which is known as the best of the good possibilities. The maxim rule is considered the best of the worst possibilities.

 

 

 

Works Cited

McConnell, Campbell R., Stanley L. Brue, and Sean Masaki Flynn. Economics: Principles, problems, and policies. New York: McGraw-Hill/Irwin, 2005.