A.P. Macroeconomics: Unit Three

question

aggregate demand

answer

the total demand for final goods and services in an economy at a given time

question

real balance effect

answer

higher prices reduce the purchasing power of money; decreases quantity of expenditures; low price levels increase expenditures and purchasing power

question

interest rate effect

answer

when a price level increases, lenders need to charge higher interest rates to get a REAL return on their loans; high interest rates discourage consumer spending and business investment

question

foreign trade effect

answer

-When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods

-Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases)

question

shifters of aggregate demand

answer

Consumer spending

investments

government spending

net exports

question

aggregate supply

answer

the sum of all the supply in the economy

question

short-run aggregate supply

answer

wages and resource prices will not increase as price levels increase

question

long-run aggregate supply

answer

wages and resource prices will increase as price levels increase

question

shifters of aggregate supply

answer

Inflationary expectations

Resource prices

Actions of the Government

Productivity

question

inflationary gap

answer

Output is high and unemployment is less than NRU

question

recessionary gap

answer

produce at lower level than what we potentially can; output is low and unemployment is more than NRU

question

stagflation

answer

declining GDP and increase in unemployment

question

short-run recessionary gap

answer

workers accept lower wages and production costs fall; AS curve shifts to the right

question

long-run recessionary gap

answer

inflation means workers seek higher wages and production costs increase; shifts AS curve to the left; back to full employment, but with a higher price level

question

shifters of LRAS

answer

(1) education and training

(2) increased capital stock in the long run

(3) improved tech

(4) increased resource availability

question

classical theory

answer

A change in AD will not change output even in the short run because prices of resources (wages) are very flexible; hands-off economics; allow market to return to long run; no matter what we do, there's a tradeoff

question

Keynesian theory

answer

using government spending to stimulate the economy; attack AD curve; use power of the government in recessionary gap, rather than letting it return to long run on its own; a decrease in AD will lead to a persistent recession b/c wages are NOT flexible

question

sticky wages

answer

prevents wages from falling; government should increase spending to close the gap

question

ratchet effect

answer

prices can easily move up, but not down

question

three ranges of aggregate supply

answer

(1) keynesian- horizontal at low output

(2) intermediate- upward sloping

(3) classical- vertical at physical capacity

question

fiscal policy

answer

things gov. can do to speed up or slow down the economy; want sustainable circumstances (full employment); spending and taxes

question

monetary policy

answer

reserve rations; open-market operations; discount rate; actions by federal reserve to stabilize dollar value

question

discretionary fiscal policy

answer

Changes in taxes or spending that are the result of deliberate changes in government policy.

question

Non-Discretionary Fiscal Policy

answer

Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

question

automatic stabilizers

answer

things that occur without passage of laes

question

contractionary fiscal policy

answer

laws that reduce inflation, decrease GDP (close an inflationary gap); government spending decreases and taxation increases (take money away from consumers so they can't spend as much)

question

expansionary fiscal policy

answer

laws that reduce unemployment and increase GDP (close a recessionary gap); government spending increases and taxation decreases

question

Marginal Propensity to Consume (MPC)

answer

the increase in consumer spending when disposable income rises by $1

question

MPC formula

answer

change in consumption/change in income

question

Marginal Propensity to Save (MPS)

answer

the increase in household savings when disposable income rises by $1

question

MPS formula

answer

change in savings/change in income or 1 minus MPC

question

spending multiplier formula

answer

1/MPS or 1/1-MPC

question

fiscal policy formula

answer

total change in GDP= multiplier (initial change in spending)

question

tax multiplier formula

answer

MPC/MPS

question

balanced budget multiplier

answer

always equal to one

question

budget deficit

answer

a shortfall of tax revenue from government spending

question

national debt

answer

The sum of government deficits over time.

question

problems of timing

answer

Recognition lag, administrative lag, operational lag to create proper policies

question

politically motivated policies

answer

politicians may use economically inappropriate policies to get reelected

question

crowding-out effect

answer

government spending might cause unintended effects that weaken the impact of the policy; gov. "crowds out" consumers or investors

question

net export effect

answer

international trade reduces the effectiveness of fiscal policies

question

3 generalizations of the inflation-unemployment relationship

answer

(1) short-run trade-off between rate of inflation and unemployment

(2) aggregate supply shocks can cause higher rates of inflation and unemployment

(3) no significant trade-off between inflation and unemployment over long periods of time

question

phillips curve

answer

a curve showing the inverse relationship between unemployment and changes in wages or prices. The Philips curve gives the trade-off between unemployment and inflation.

question

aggregate supply shocks

answer

sudden, large increases in resource costs that jolt an economy's short-run aggregate supply curve leftward

question

long-run phillips curve

answer

(1) trade-off- none for the long run between inflation and unemployment

(2) short-run phillips curve- when actual rate of inflation is higher than expected, profits temporarily rise and unemployment rate temporarily falls

question

long-run vertical Phillips Curve

answer

unemployment returns to its natural rate; any rate of inflation is consistent w/ 5 percent natural rate of unemployment

question

Disinflation

answer

reductions in the inflation rate from year to year

1 of 47

question

aggregate demand

answer

the total demand for final goods and services in an economy at a given time

question

real balance effect

answer

higher prices reduce the purchasing power of money; decreases quantity of expenditures; low price levels increase expenditures and purchasing power

question

interest rate effect

answer

when a price level increases, lenders need to charge higher interest rates to get a REAL return on their loans; high interest rates discourage consumer spending and business investment

question

foreign trade effect

answer

-When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods

-Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases)

question

shifters of aggregate demand

answer

Consumer spending

investments

government spending

net exports

question

aggregate supply

answer

the sum of all the supply in the economy

question

short-run aggregate supply

answer

wages and resource prices will not increase as price levels increase

question

long-run aggregate supply

answer

wages and resource prices will increase as price levels increase

question

shifters of aggregate supply

answer

Inflationary expectations

Resource prices

Actions of the Government

Productivity

question

inflationary gap

answer

Output is high and unemployment is less than NRU

question

recessionary gap

answer

produce at lower level than what we potentially can; output is low and unemployment is more than NRU

question

stagflation

answer

declining GDP and increase in unemployment

question

short-run recessionary gap

answer

workers accept lower wages and production costs fall; AS curve shifts to the right

question

long-run recessionary gap

answer

inflation means workers seek higher wages and production costs increase; shifts AS curve to the left; back to full employment, but with a higher price level

question

shifters of LRAS

answer

(1) education and training

(2) increased capital stock in the long run

(3) improved tech

(4) increased resource availability

question

classical theory

answer

question

Keynesian theory

answer

question

sticky wages

answer

prevents wages from falling; government should increase spending to close the gap

question

ratchet effect

answer

prices can easily move up, but not down

question

three ranges of aggregate supply

answer

(1) keynesian- horizontal at low output

(2) intermediate- upward sloping

(3) classical- vertical at physical capacity

question

fiscal policy

answer

things gov. can do to speed up or slow down the economy; want sustainable circumstances (full employment); spending and taxes

question

monetary policy

answer

reserve rations; open-market operations; discount rate; actions by federal reserve to stabilize dollar value

question

discretionary fiscal policy

answer

Changes in taxes or spending that are the result of deliberate changes in government policy.

question

Non-Discretionary Fiscal Policy

answer

Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

question

automatic stabilizers

answer

things that occur without passage of laes

question

contractionary fiscal policy

answer

laws that reduce inflation, decrease GDP (close an inflationary gap); government spending decreases and taxation increases (take money away from consumers so they can't spend as much)

question

expansionary fiscal policy

answer

laws that reduce unemployment and increase GDP (close a recessionary gap); government spending increases and taxation decreases

question

Marginal Propensity to Consume (MPC)

answer

the increase in consumer spending when disposable income rises by $1

question

MPC formula

answer

change in consumption/change in income

question

Marginal Propensity to Save (MPS)

answer

the increase in household savings when disposable income rises by $1

question

MPS formula

answer

change in savings/change in income or 1 minus MPC

question

spending multiplier formula

answer

1/MPS or 1/1-MPC

question

fiscal policy formula

answer

total change in GDP= multiplier (initial change in spending)

question

tax multiplier formula

answer

MPC/MPS

question

balanced budget multiplier

answer

always equal to one

question

budget deficit

answer

a shortfall of tax revenue from government spending

question

national debt

answer

The sum of government deficits over time.

question

problems of timing

answer

Recognition lag, administrative lag, operational lag to create proper policies

question

politically motivated policies

answer

politicians may use economically inappropriate policies to get reelected

question

crowding-out effect

answer

government spending might cause unintended effects that weaken the impact of the policy; gov. "crowds out" consumers or investors

question

net export effect

answer

international trade reduces the effectiveness of fiscal policies

question

3 generalizations of the inflation-unemployment relationship

answer

(1) short-run trade-off between rate of inflation and unemployment

(2) aggregate supply shocks can cause higher rates of inflation and unemployment

(3) no significant trade-off between inflation and unemployment over long periods of time

question

phillips curve

answer

a curve showing the inverse relationship between unemployment and changes in wages or prices. The Philips curve gives the trade-off between unemployment and inflation.

question

aggregate supply shocks

answer

sudden, large increases in resource costs that jolt an economy's short-run aggregate supply curve leftward

question

long-run phillips curve

answer

(1) trade-off- none for the long run between inflation and unemployment

(2) short-run phillips curve- when actual rate of inflation is higher than expected, profits temporarily rise and unemployment rate temporarily falls

question

long-run vertical Phillips Curve

answer

unemployment returns to its natural rate; any rate of inflation is consistent w/ 5 percent natural rate of unemployment

question

Disinflation

answer

reductions in the inflation rate from year to year

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