Macro Midterm Review

Wealth Effect

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Interest Rate Effect

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Inflationary Gap

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Recessionary Gap

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Stagflation

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Expansionary Fiscal Policy

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Contractionary Fiscal Policy

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Inflationary Gap

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Recessionary Gap

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Stagflation

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)