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Macroeconomics Final Exam Short Answer Questions
Terms in this set (27)
Define Aggregate Demand and the determinants that shift it. What could be happening if AD expands too quickly?********
Aggregate Demand is the total demand for final goods and services in an economy at a given time.
Determinants of aggregate demand include:
1. Changes in consumption(consumer wealth, consumer expectations, and taxes)
2. Changes in investment(interest rates, expected returns)
3. Changes in government policy(fiscal policy, monetary policy)
4. Changes in net exports(exchange rates, government trade policies).
If Aggregate Demand increases too quickly then there will be more jobs available to the public and a market failure or recession can occur.
Define Aggregate Supply and determinants that shift it. Show the curve in the three time periods discussed in class. What happens if cost goes up? *********
Aggregate Supply is the total supply of goods and services produced within an economy at a given overall price level in a given time period.
Determinants of aggregate supply are changes:
1. Changes in resource prices(wages, commodity prices)
2. Changes in productivity
3. Changes in business taxes and regulations.
If cost goes up then it may increase firms profitability if wages still lag, but they cannot bring forth any output responses since output is already at the maximum we can produce at full employment.
and its benefits and problems.
What is the appropriate response for a recession using fiscal policy?
Inflation? What is a budget deficit/surplus? What is public debt? *********
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nations economy.
The positive things about fiscal policy is that it significantly impacts the national income and therefore has an immediate effect on the economy. Another thing that is good about fiscal policy is that taxes on negative externalities decreases consumption of negative externalities are demerit goods. The last reason why fiscal policy is good is because different tax rates on different levels of income reduce the gaps between the rich and the poor. A few of the negative things about fiscal policy is that it is not very flexible. The last thing that makes fiscal policy negative is one problem can arise when the government is trying to solve a different problem.
Inflation is the general rise in price level, reduces the purchasing power of money.
A budget deficit is the amount by which government expenses exceed income.
A surplus is when income exceeds spending, giving the government a budget
Public debt is any money owed by a government agency, Mortgages or other liabilities for which a commercial entity is responsible
What are the functions of money?Define them. Define the M1 and M2. What distinguishes them from each other? What back the US money supply?
The functions of money include Medium of Exchange, Store of Value, and Unit of Account. The M1 is a measure of money supply that includes cash and checking deposits. M2 includes savings deposits, money market funds, and other deposits. The thing that backs up the US money supply is full faith and the credit of the US.
What is the FED? (Structure, function, power and responsibilities)
The FED is the Federal Reserve System. It started in the 1900s, it is a central bank with 12 regional banks, it is the money manager.
Discuss the Laffer Curve and the Phillips Curve.
The Laffer Curve is a relationship between tax rates and tax revenue collected by governments. The Phillips Curve is the inverse relationship between unemployment and inflation.
Describe the fractional reserve system.(i.e. How did it start, characteristics, strengths and weaknesses) What is the money multiplier and how does it work?
The fractional reserve system is when a bank holds less than 100 percent of their checkable-deposits(not all of the money that is deposited into the bank is held in cash by the bank) It was started by the Goldsmiths(receipts acted as loans for customers who gave the bank gold in return for cash, however bank did not have all cash on hand at the time of transactions) The advantages of the fractional reserve system is that it allows banks to capitalize on the funds lying unused to generate sustainable returns. Also the bank gains interest by the fractional reserve system. Some disadvantages to the fractional reserve system is that it is theoretically creating "fake" money since there is not as much money in the bank that people are putting into the bank. Another disadvantage is that it limits liquidity and creates the danger of a bank run. The money multiplier is the amount of money that banks guarantee with each dollar of reserves(which is the amount of deposits that the Federal Reserves requires the banks to hold and not lend out)
Discuss the two types of demand for money.(Graphs, what influences them, etc.)
The two types of demand for money are Transaction Demand and Asset Demand. Transaction Demand is the money needed to accommodate a firms expected cash transactions. Asset Demands acts inversely with interest rates.
How does the FED use monetary policy to control the economy? Main tools? *********
The FED uses monetary policy to control the economy by changing the money supply to influence the interest rates and assist the economy in achieving price level stability, full employment, and economic growth. The main tools that the FED uses to do this is by using open market operations, discount rate, and reserve requirements.
Based on what you learned in the class, how can the government and the FED help slow down inflation? Help recession?
Inflation is when the economy grows due to spending. As this happens prices rise and the currency within the economy is worth less than before. The government is able to slow down inflation through the contractionary monetary policy, which helps to reduce spending. To carry out contractionary policy the government must increase interest rates through the Federal Reserve, increase reserve requirements on the amount of money banks are required to keep on hand to cover withdraws, and then to directly or indirectly reduce the money supply by enacting policies that encourage reduction of the money supply
What is Comparative advantage? How does comparative advantage help us understand international trade? Looking at a domestic market in the context of international trade, how does a country decide whether it will import or export a product?
Comparative advantage is a situation in which a person or country can produce a specific product at a lower opportunity cost than some other person or country; the basis for specialization and trade. A country would look at its GDP to decide whether or not it will import or export a product.
Discuss the Monetarist view. What is the Taylor rule?
The Monetarist view is 1. a set of guidelines to be followed by a central bank that wishes to adjust monetary policy over time to achieve goals such as promoting economic growth, encouraging full employment, and ammoniating a stable price level. 2. The guidelines for conducting monetary policy suggested by monetarism. The Taylor rule is a monetary rule that would stipulate exactly how much the Federal Reserve System should change real interest rates in response to divergences for real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.
Describe the difference between real GDP and nominal GDP. Which concept is more useful for measuring change in the economy over time? Why?*******
Real GDP is when inflation is taken into account while nominal GDP is when inflation has not yet been taken out of the GDP. Nominal GDP is more useful for measuring change in the economy over time because there is always going to be inflation in the economy so you should just take that into account also when you are measuring the GDP over a few years.
Define the four categories of expenditures which compromise GDP? *********
The four categories of expenditures that compromise GDP are Investment, Government Purchases, Net Exports, and Consumption.
What is Modern Economic Growth? Name the institutional structures that promote this growth.
Modern economic growth is a sustained ongoing increase in the standard of living. The institutional structures that promote this growth include culture, social, and political. Some things that effect this include strong property rights, patents, education, financial institutions, free trade, and competitive market system.
Describe the business cycle. What does it look like graphically? *********
Describe how unemployment is measured. What is full employment? Name three types. ******
Unemployment is measured through frictional, structural, and cyclical. Frictional is individuals searching for jobs or waiting to take jobs soon. Structural occurs due to changes in the structure in the demand for labor. And Cyclical is caused by the decline in total spending(typically beings during the recession phase of the business cycle).
What is inflation? What is a Price Index?
Inflation is indicates an increase in price of goods and services. Price Index is a percentage that shows the extent to which a price has changed over a period of time and is used to determine real GDP.
Discuss the multiplier effect in the context of the economy expanding or contracting.
The multiplier effect is an increase in spending which produces an increase in a nations income and consumption greater than the initial amount spent. If a county does not increase its spending, then they will not be able to produce as much income as a country that does use the multiplier effect.
Using the closed circular flow model, show how you can define real GDP from the expenditure side and the income side. *********
What is a brief definition of economics? Distinguish between Microeconomics and Macroeconomics. Also, between positive and normative economic statements. *********
Economics is a social science concerned with making choices under conditions of scarcity.
Macroeconomics is the study of the entire economy or a major aggregate of the economy
Microeconomics is the study of the individual consumer, firm, or market
Positive economics is an economics is an economic statement that is factual
Normative economics is an economic statement that involves value judement
State the law of demand and explain why the other things equal assumption is critical to it. List five basic determinants of market demand that could cause demand to increase. State the law of supply and explain why the other things equal assumption is critical to it. List six basic determinants of market supply. *********
The law of demand states as price rises, quantity demanded decreases. As price falls, quantity demanded rises. Having an inverse relationship.
Five basic determinants:
2. Number of buyers
4. Prices of related goods
5. Consumer expectations
Law of supply states as prices rise, quantity supplied rise. As prices fall, the quantity supplied falls as well. Having a direct relationship.
Six basic determinants:
1. Resource prices
3. Taxes and subsidies
4. Prices of other goods
5. Producer expectations
6. Number of sellers
What role does freedom play in capitalism? How important is it to the operation of a competitive market economy? Explain what is meant by a command economy?
Capitalism is the buying or selling of goods and services in a free economy. In a command economy the government controls property and production
Is demand more important than supply in determining equilibrium price and quantity in a competitive market? Explain. What are the conditions necessary to produce neither an "under allocation" nor "over allocation" of resources?
Both supply and demand are important in determining equilibrium price and quantity in a competitive market because without a demand then nothing will be bought and without supply there would be nothing to buy.
Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and 3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.
No, there is no evidence that the law of demand has been violated because the Law of Demand says that if the price of a good increases, then the demand of the good decreases
What are major three key indicators we use to judge our economy. Define them. Give an example of how they could be used. (ie. The "indicators" indicates that the economy is _____, because it shows _____.)
1. GDP indicates the overall economy because it is a list of all goods and services produced.
2. Inflation indicates an increase in price of goods and services
3. Unemployment indicates the number of people seeking a job
Draw and Label the Simple Closed Circular Flow Model.
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Krugman's Economics for AP*
David Anderson, Margaret Ray
Principles of Economics
Paul Krugman, Robin Wells
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