AP Macroeconomics Chapter 28-30

question

Marginal Propensity to Consume (MPC)

answer

how much people consume rather than save when there is a change in income

question

Formula for MPC

answer

change in consumption / change in income

question

Marginal Propensity to Save (MPS)

answer

how much people save rather than consume when there is a change in income

question

Formula for MPS

answer

change in savings / change in income

question

MPS + MPC =

answer

question

What is the reasoning for the formula MPS + MPC = 1?

answer

whatever people won't spend, they save and vice versa

question

The higher the MPC, the larger the _______ _________

answer

multiplier effect

question

What are the 5 determinants of consumption?

answer

1. disposable income
2. wealth
3. future expectations
4. taxes
5. real interest rates

question

As disposable income rises, consumption ________

answer

rises

question

As disposable income falls, consumption _______

answer

falls

question

As wealth rises, consumption ______

answer

rises

question

As wealth falls, consumption ________

answer

falls

question

As expectations are positive, consumption __________

answer

rises

question

As expectations are negative, consumption _______

answer

falls

question

As taxes fall, consumption ____

answer

rises

question

As taxes rise, consumption _____

answer

falls

question

As real interest rates fall, consumption ____

answer

rises

question

As real interest rates rises, consumption ____

answer

falls

question

What does the investment graph compare?

answer

real interest rate: investment

question

Is the investment graph positive or negative?

answer

negative

question

What are the 6 determinants of investment?

answer

1. business costs
2. corporate taxes
3. technology
4. capacity level
5. business confidence
6. real interest rates

question

As business costs fall, investment ____

answer

rises

question

As business costs rises, investment ____

answer

falls

question

As corporate taxes fall, investment ____

answer

rises

question

As corporate taxes rise, investment ____

answer

falls

question

As technology improves, investment ____

answer

rises

question

As capacity level falls, investment ___

answer

rises

question

As capacity level rises, investment _____

answer

falls

question

As business confidence rises, investment _____

answer

rises

question

As business confidence falls, investment _____

answer

falls

question

As real interest rate falls, investment ____

answer

rises

question

As real interest rate rises, investment ____

answer

falls

question

What are the 3 determinants of net exports (Xn)?

answer

1. national income
2. relative prices
3. exchange rates

question

As foreign national income rises, Xn ____

answer

rises

question

As foreign national income falls, Xn _____

answer

falls

question

As domestic income falls, Xn _____

answer

rises

question

As domestic income rises, Xn ____

answer

falls

question

As the relative prices of foreign goods rises, Xn ____

answer

rises

question

As the relative prices of foreign goods falls, Xn ____

answer

falls

question

As the domestic currency becomes weaker, Xn _____

answer

rises

question

As the domestic currency becomes stronger, Xn ____

answer

falls

question

Multiplier Analysis

answer

A change in initial spending has a multiplied effect on Real GDP

question

The idea of the multiplier analysis is that spending for one is

answer

income for the next

question

Formula for multiplier effect

answer

1/(1-MPC) or 1/ MPS

question

Formula to find the increase/decrease to real GDP

answer

Change in real GDP = change in spending * multiplier

question

Aggregate

answer

added all together (all prices and quantities)

question

Aggregate demand

answer

all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels

question

What is the relationship between price level and real GDP in aggregate demand?

answer

inverse (negative slope)

question

If price level increases (inflation), then real GDP demanded ____

answer

falls

question

If price level decreases (deflation), then real GDP demanded

answer

increases

question

AD =

answer

C + I + G + Xn

question

What are the 3 effects responsible for the downward slope of aggregate demand?

answer

1. wealth effect
2. interest rate effect
3. foreign trade effect

question

Wealth effect

answer

higher price levels reduce the purchasing power of money and decreases the quantity of expenditures

question

Interest-rate effect

answer

when the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans

question

In the interest-rate effect, higher interest rates ____

answer

discourage consumer spending and business investment

question

Foreign trade effect

answer

When US price level rises, foreign buyers buy fewer US goods and Americans buy more foreign goods

question

What happens to exports and imports in the foreign trade effect?

answer

If US price levels rise, exports fall and imports rise causing real GDP demanded to fall

question

In an AD curve, an increase in spending shifts the curve to the

answer

right

question

In an AD curve, a decrease in spending shifts the curve to the

answer

left

question

What are the 4 shifters of Aggregate Demand?

answer

1. change in consumer spending
2. change in investment spending
3. change in government spending
4. change in net exports

question

Change in consumer spending (4)

answer

1. increase in disposable income
2. consumer expectations
3. household indebtedness
4. taxes

question

Change in investment spending (4)

answer

1. real interest rates
2. future business expectations
3. productivity and technology
4. business taxes

question

Change in government spending

answer

government expenditures (defense spending, public works programs)

question

Change in net exports (2)

answer

1. exchange rates
2. national income compared to abroad

question

Aggregate supply

answer

the amount of goods and services (real GDP) that firms will produce in an economy at different price levels

question

Short-run aggregate supply

answer

wages and resource prices will NOT increase price levels increase

question

In short run aggregate supply, if they have higher profits, the firm _____

answer

has the incentive to increase production

question

Long-run aggregate supply

answer

wages and resource prices will increase as price levels increase

question

Shifters in Aggregate Supply (3)

answer

1. change in resource prices
2. change in actions of the government
3. change in productivity

question

Change in resource prices (3)

answer

1. prices of domestic and imported goods (increase or decrease in Canadian lumber)
2. supply shock (+ / -)
3. inflationary expectations

question

Example of inflationary expectations

answer

If producers expect higher prices in the future, workers will demand higher wages and costs will increase therefore decreasing aggregate supply

question

Change in actions of the government (3)

answer

1. taxes on producers
2. subsidies for domestic producers
3. government regulations

question

Change in productivity

answer

technology

question

Increase in AD

answer

price levels increase, rGDP increase

question

Decrease in AD

answer

price levels decrease, rGDP decrease

question

Increase in AS

answer

price level decrease, rGDP increase

question

Decrease in AS

answer

price level increase, rGDP decrease

1 of 77

question

Marginal Propensity to Consume (MPC)

answer

how much people consume rather than save when there is a change in income

question

Formula for MPC

answer

change in consumption / change in income

question

Marginal Propensity to Save (MPS)

answer

how much people save rather than consume when there is a change in income

question

Formula for MPS

answer

change in savings / change in income

question

MPS + MPC =

answer

question

What is the reasoning for the formula MPS + MPC = 1?

answer

whatever people won't spend, they save and vice versa

question

The higher the MPC, the larger the _______ _________

answer

multiplier effect

question

What are the 5 determinants of consumption?

answer

1. disposable income
2. wealth
3. future expectations
4. taxes
5. real interest rates

question

As disposable income rises, consumption ________

answer

rises

question

As disposable income falls, consumption _______

answer

falls

question

As wealth rises, consumption ______

answer

rises

question

As wealth falls, consumption ________

answer

falls

question

As expectations are positive, consumption __________

answer

rises

question

As expectations are negative, consumption _______

answer

falls

question

As taxes fall, consumption ____

answer

rises

question

As taxes rise, consumption _____

answer

falls

question

As real interest rates fall, consumption ____

answer

rises

question

As real interest rates rises, consumption ____

answer

falls

question

What does the investment graph compare?

answer

real interest rate: investment

question

Is the investment graph positive or negative?

answer

negative

question

What are the 6 determinants of investment?

answer

1. business costs
2. corporate taxes
3. technology
4. capacity level
5. business confidence
6. real interest rates

question

As business costs fall, investment ____

answer

rises

question

As business costs rises, investment ____

answer

falls

question

As corporate taxes fall, investment ____

answer

rises

question

As corporate taxes rise, investment ____

answer

falls

question

As technology improves, investment ____

answer

rises

question

As capacity level falls, investment ___

answer

rises

question

As capacity level rises, investment _____

answer

falls

question

As business confidence rises, investment _____

answer

rises

question

As business confidence falls, investment _____

answer

falls

question

As real interest rate falls, investment ____

answer

rises

question

As real interest rate rises, investment ____

answer

falls

question

What are the 3 determinants of net exports (Xn)?

answer

1. national income
2. relative prices
3. exchange rates

question

As foreign national income rises, Xn ____

answer

rises

question

As foreign national income falls, Xn _____

answer

falls

question

As domestic income falls, Xn _____

answer

rises

question

As domestic income rises, Xn ____

answer

falls

question

As the relative prices of foreign goods rises, Xn ____

answer

rises

question

As the relative prices of foreign goods falls, Xn ____

answer

falls

question

As the domestic currency becomes weaker, Xn _____

answer

rises

question

As the domestic currency becomes stronger, Xn ____

answer

falls

question

Multiplier Analysis

answer

A change in initial spending has a multiplied effect on Real GDP

question

The idea of the multiplier analysis is that spending for one is

answer

income for the next

question

Formula for multiplier effect

answer

1/(1-MPC) or 1/ MPS

question

Formula to find the increase/decrease to real GDP

answer

Change in real GDP = change in spending * multiplier

question

Aggregate

answer

added all together (all prices and quantities)

question

Aggregate demand

answer

all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels

question

What is the relationship between price level and real GDP in aggregate demand?

answer

inverse (negative slope)

question

If price level increases (inflation), then real GDP demanded ____

answer

falls

question

If price level decreases (deflation), then real GDP demanded

answer

increases

question

AD =

answer

C + I + G + Xn

question

What are the 3 effects responsible for the downward slope of aggregate demand?

answer

1. wealth effect
2. interest rate effect
3. foreign trade effect

question

Wealth effect

answer

higher price levels reduce the purchasing power of money and decreases the quantity of expenditures

question

Interest-rate effect

answer

when the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans

question

In the interest-rate effect, higher interest rates ____

answer

discourage consumer spending and business investment

question

Foreign trade effect

answer

When US price level rises, foreign buyers buy fewer US goods and Americans buy more foreign goods

question

What happens to exports and imports in the foreign trade effect?

answer

If US price levels rise, exports fall and imports rise causing real GDP demanded to fall

question

In an AD curve, an increase in spending shifts the curve to the

answer

right

question

In an AD curve, a decrease in spending shifts the curve to the

answer

left

question

What are the 4 shifters of Aggregate Demand?

answer

1. change in consumer spending
2. change in investment spending
3. change in government spending
4. change in net exports

question

Change in consumer spending (4)

answer

1. increase in disposable income
2. consumer expectations
3. household indebtedness
4. taxes

question

Change in investment spending (4)

answer

1. real interest rates
2. future business expectations
3. productivity and technology
4. business taxes

question

Change in government spending

answer

government expenditures (defense spending, public works programs)

question

Change in net exports (2)

answer

1. exchange rates
2. national income compared to abroad

question

Aggregate supply

answer

the amount of goods and services (real GDP) that firms will produce in an economy at different price levels

question

Short-run aggregate supply

answer

wages and resource prices will NOT increase price levels increase

question

In short run aggregate supply, if they have higher profits, the firm _____

answer

has the incentive to increase production

question

Long-run aggregate supply

answer

wages and resource prices will increase as price levels increase

question

Shifters in Aggregate Supply (3)

answer

1. change in resource prices
2. change in actions of the government
3. change in productivity

question

Change in resource prices (3)

answer

1. prices of domestic and imported goods (increase or decrease in Canadian lumber)
2. supply shock (+ / -)
3. inflationary expectations

question

Example of inflationary expectations

answer

If producers expect higher prices in the future, workers will demand higher wages and costs will increase therefore decreasing aggregate supply

question

Change in actions of the government (3)

answer

1. taxes on producers
2. subsidies for domestic producers
3. government regulations

question

Change in productivity

answer

technology

question

Increase in AD

answer

price levels increase, rGDP increase

question

Decrease in AD

answer

price levels decrease, rGDP decrease

question

Increase in AS

answer

price level decrease, rGDP increase

question

Decrease in AS

answer

price level increase, rGDP decrease

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