hi everybody Jacob breed here from reviewe eon.com today we're going to be looking at unit three for macroeconomics this one is all about national income and price these videos go alongside the total review booklet from review eon.com if you're interested in picking up a copy head down to the links below and don't forget to like And subscribe let's get into the content yes yes yes the first concept we're going to learn in this unit is called multipliers some spending by a consumer within the economy will Ripple through the economy and impact GDP by a greater amount that's because consumers have disposable income that's personal income minus taxes and there are two things they can do with that income they can spend it or save it that leads us to What's called the marginal propensity to consume the marginal propensity to consume is the percentage of new income that a consumer is likely to spend on average the marginal propensity to save on the other hand is the percentage of new disposable income that a consumer will save rather than spend so for example if my disposable income increases by $11,000 and my spending increases by $800 while my savings increases by $200 that means my marginal propensity to consume is8 and my marginal propensity to save is.2 let's see an example of how my new spending of $800 will Ripple through the economy and impact GDP by a larger amount let's assume that everybody within the economy spends 80% of their income and saves 20% that means when I take my $800 and buy a new fishing boat the boat store owner will now have $800 of new disposable income they will spend 80% of that and purchase a new bicycle for $640 they'll save the rest then the bicycle store owner will spend $512 on a new television then the electronic store owner will spend $49.60 on a trip to the beach then the travel agent will spend $327 68 on a membership to their rock climbing gym and it won't stop there that money will continue to be spent 80% of it and saved 20% of it over and over and over again Rippling through the economy we have a formula to find out how much money that initial $800 increase in consumption can impact GDP it's called the spending multiplier the spending multiplier is 1 divided by the marginal propensity to save or 1 / 1 minus the marginal propensity to consume this spending multiplier applies to any new spending within the economy it can be consumer spending business spending government spending or foreign spending in the form of net exports for the example we just saw one divided by the marginal propensity to save of 0.2 gives us a spending multiplier of five that means the $800 of new consumption that I started when I got an increase in my disposable income of $11,000 could cause a $4,000 increase in gross domestic product there is another multiplier you need to know and it's called the tax multiplier when the government increases or decreases taxes it changes the amount of disposable income consumers have and that will also Ripple through the economy in the same multiplier effect we just saw the tax multiplier has a different value though you find that tax multiplier by taking the negative of the marginal propensity to consume and dividing it by the marginal propensity to save or the negative MPC divided by 1 minus the MPC the tax multiplier has an absolute value that is one less than the spending multiplier and that's because when the government decreases our taxes that changes our disposable income but some of that money will actually be saved rather than spent getting back to our example we have a tax multiplier of .8 ided .2 that gives us a -4 tax multiplier if the government decreases taxes by $10 million that will Ripple through the economy causing a maximum of4 $ Million worth of GDP increase the next thing we're going to talk about is the Asad model of the economy we're going to start off by discussing the aggregate demand curve aggregate demand is the demand for all goods and services within an entire economy when we graph it out we have price level on the Y AIS and real GDP on the x-axis we have a downward sloping aggregate demand curve which shows there's an inverse relationship between the price level and the quantity of real output produced within the economy at high prices we have low low levels of output and at low prices we have higher levels of output there are three reasons why we have a downward sloping aggregate demand curve the first is the wealth effect the wealth effect says that as prices fall real wealth is increased and as a result consumers increase their purchasing of goods and services within the economy next is the interest rate effect that tells us as price levels fall interest rates also tend to fall and with that gross investment tends to increase the last one is the net export effect that tells us at lower price levels exports are cheaper for foreign countries and as a result exports will increase when price levels fall we have four aggregate demand shifters that you need to know first one is consumer spending second one is gross investment third one is government purchases and the fourth one is net exports alog together this is C plus IG plus G Plus xn this is the formula for the output expenditure model of GDP if any of those things increase it's going to shift our aggregate demand curve to the right if any of those things decrease it will shift the aggregate demand curve to the left the next thing you need to know for the Asad model of the economy is the short-run aggregate supply curve that is the supply curve for all goods and services within the economy in the short run we have a direct relationship between the price level and the quantity of goods and services produced within the economy so at low prices we have low quantities of output and at high prices we have higher quantities of output the reason for that relationship is because wages and other resource prices are sticky in the short run there are five short run aggregate supply curve shifters you need to know the first is resource prices often we're looking at wages when there's an increase in resource prices short run aggate supply curve shifts to the left when there's a decrease in resource prices short R iate supply curve shifts to the right the second one is productivity increases in productivity shift that short run aate supply curve to the right the next one is inflation expectations higher inflation expectations shift the short run Agate supply curve to the left and lower inflation expectations shift the short run aurate supply curve to the right if the government decreases taxes specifically on businesses it will shift that short run aurate supply curve to the right if they increase taxes on businesses it will shift the left the last shifter is business regulations increases in business regulations will decrease the short run a supply curve shifting it to the left and decreases in business regulation will shift it to the right if any of those things change change it will shift the short run aggate supply curve to the right or to the left and just like you've seen in previous Supply curves a leftward shift is a decrease and a rightward shift is an increase for the Asad model we have a third curve this is the long run aggregate supply curve it is vertical at the Full Employment quantity of output when you graph it out you have your vertical long run aggate supply curve with YF down there at the bottom that stands for full employ employment national income in the long run at low prices you will have the Full Employment level of output and at high prices you will still have the Full Employment level of output that's because in the long run wages are flexible and they adjust to new price levels the long run aggregate supply curve represents a country's long run potential output that can increase or decrease as a result of a change in the quantity of resources quality of resources productivity of those resources or technology changes anything that shifts the production possibilities curve inward will shift the long run aggregate supply curve to the left anything that shifts the production possibilities curve outward will shift the long run aggate supply curve to the right that long run aggate supply curve just like a production possibilities curve represents an economy's long run potential output short run equilibrium within an economy is found at the intersection between the aggregate demand curve and the short-run aggregate supply curve if we put them both on the same Gra we've got our price level right there at the intersection and our quantity of real output down there on the x-axis as you learned back in unit two regarding the business cycle sometimes our current level of output exceeds our long run potential output when that happens we have an inflationary Gap if we add in the long run aggregate supply curve we can see that we are currently producing on this graph at a level of output that is greater than the Full Employment output that's because y1 is greater than YF that means this economy is currently experiencing low levels of unemployment we can also illustrate a recessionary gap with the Asad model where the current output is less than the long run potential output when that happens you will see the long run accurate supply curve to the right of the current level of output that means we have low national income and high levels of unemployment when the economy does not have a recessionary gap or an inflationary Gap the economy is said to be at long run equilibrium that means the current level of output will equal the Full Employment level of output when that happens the long run aggregate supply curve runs through that intersection of the aggregate demand curve and short run aggate supply curve here the economy's current output is equal to the long run output when that happens the unemployment rate within the economy equals the natural rate of unemployment that means there's no cyclical unemployment in the long run the economy tends to return to that long run output that we just saw but in the short run we can have demand shocks or Supply shocks to move us away from that equilibrium let's say for example the economy has a dramatic increase in net exports that would cause a rightward shift of the aggregate demand curve causing the economy to be in an inflationary Gap current output is greater than the long run full employment output when there's a right word shift of the aggate demand curve price levels increase and that is called demand pull inflation price levels rise as a result of the increase in aggregate demand you can also have negative demand shocks as a result of a decrease in consumer confidence which will reduce consumer spending when that happens the price level Falls and real output will also decrease now it's lower than the Full Employment level of output the short run aggregate supply curve can also shock The Economy based on one of those shifters we saw earlier if for example there was a dramatic decrease in the price of oil that would cause a rightward shift of the short run accurate supply curve price levels would fall and real output would increase now the economy is in an inflation AR Gap to the economy that would cause the price level to rise and real output to decrease we call this type of inflation cost push inflation it's also called stagflation because we have higher price levels and a recession at the same time in the long run the economy will return to Long Run equilibrium even if there is no government intervention here we have a recessionary gap where we'll talk about how that occurs first off wages fall because unemployed workers will eventually accept lower wages to find work when that occurs the lower input costs for businesses cause the short run aggregate supply curve to shift to the right restoring long run equilibrium lower prices but back to full employment if on the other hand we have an inflationary Gap that means the economy is currently producing more than its long run potential eventually wages and other resource prices will rise those higher input costs will cause a short run accurate supply curve shift to the left when that that happens we will have an increase in price levels but the economy will be returning to the Full Employment level of output now as we just saw the economy will fix itself without any government intervention but fiscal policy taxing and spending can move the economy to Long Run equilibrium more quickly expansionary fiscal policy is used to fight unemployment by increasing government spending and or decreasing taxes that will increase the budget deficit or decrease a surplus but it will return the economy to longrun equilibrium more quickly than waiting for the long run here's what it looks like on the graph this economy has a recessionary gap and expansionary fiscal policy will increase G government purchases or increase consumption through tax cuts that will increase the aggate demand curve shifting it to the right increasing the price level but returning the economy to Full Employment the government can use contractionary fiscal policy to fight inflation by decreasing government spending and or increasing taxes that will decrease the budget deficit or increase a surplus but it will also push the economy back to Long Run equilibrium more quickly here's what it looks like on the graph this economy has an inflationary Gap contractionary fiscal policy will decrease G government purchases or decrease C consumption when that happens the aggregate demand curve is going to shift to the left pushing the price level down and returning the economy back to the Full Employment level of output right there at YF and now Y2 even without any discretionary fiscal policy action by the president or congress automatic stabilizers will limit the fluctuations of the business cycle an automatic stabilizer is anything that impacts the budget deficit when there is change in the business cycle automatic stabilizers decrease the budget deficit during expansions and increase the budget deficit during contractions one automatic stabilizer is taxes taxes are based on people's income and as a result they increase during expansions because people are earning more money and taxes decrease during contractions because people are earning less money transfer payments are another automatic stabilizer those are things like unemployment compensation unemployment compensation decreases during times of expansion because fewer people are unemployed and they increase during contractions because fewer people are unemployed as a result these automatic stabilizers limit the fluctuations of the business cycle and make recessions less deep and inflationary gaps less strong we got through it that was a lot of information there and if you knew it all you are on your way to acing your next exam if you need a little more help head down to the links below where there are lots of games and activities from review eon.com to help you study and practice the skills you need for that next exam if you want to support this channel make sure you like And subscribe and then head over to review eon.com and pick up the total review booklet with everything you need to know to pass your final exam or AP economics exam thank you very much I'll see you guys next time