Macroeconomic Equilibrium and Multipliers Free Online FlashCards

What determines short-run macroeconomic equilibrium?

Short-run equilibrium occurs where AD intersects SRAS. This determines both real GDP and the economy’s price level.

What shifts aggregate demand leftward?

Aggregate demand is C + I + G + (X − M). A decrease in any component shifts AD leftward, generally lowering short-run real GDP and the price level or inflationary pressure.

What is potential GDP?

Potential GDP is the real output the economy can produce when resources are employed at sustainable rates. It does not require zero unemployment because frictional and structural unemployment remain.

What is the formula for the output gap?

The output gap equals actual real GDP minus potential GDP: Actual real GDP − Potential GDP. It can also be expressed as a percentage of potential GDP.

How is a recessionary gap identified?

A recessionary gap occurs when equilibrium real GDP is below potential GDP (Y < YP). It is associated with cyclical unemployment, idle resources, and downward pressure on inflation.

How is an inflationary gap identified?

An inflationary gap occurs when equilibrium real GDP exceeds potential GDP (Y > YP). Strong demand strains resources, raising wages, production costs, and upward pressure on prices.

Where does expenditure-output equilibrium occur?

Expenditure-output equilibrium occurs where planned aggregate expenditure equals real GDP (AE = Y), represented by the intersection of the AE line and the 45-degree line.

How do inventories push output toward expenditure equilibrium?

If planned expenditure exceeds current output, inventories fall unexpectedly and firms increase production. If planned expenditure is below output, inventories rise and firms reduce production.

What relationship links MPC and MPS?

MPC is the fraction of an additional dollar of disposable income consumed; MPS is the fraction saved. Because income is either consumed or saved, MPC + MPS = 1.

What is the simple spending multiplier?

In a simple economy, the spending multiplier is k = 1/(1 − MPC) = 1/MPS. It magnifies an initial autonomous-spending change through repeated rounds of income and consumption.

If MPC is 0.75 and investment rises $20 billion, what is ΔY?

The multiplier is 1/(1 − 0.75) = 4. Therefore, ΔY = 4 × $20 billion = $80 billion.

Why do saving, taxes, and imports reduce the multiplier?

Saving, taxes, and imports are leakages from the spending stream. Greater leakages reduce each successive spending round and therefore make the multiplier smaller.