Study sets, textbooks, questions
Upgrade to remove ads
Terms in this set (20)
4 Reasons Behind downward sloping AD curve
Wealth Effect, Interest Rate Effect, Foreign Relative Price Effect, Foreign Exchange Rate Effect
What is the opportunity cost of holding money?
The interest rate
An increase in the price level to a change in Aggregate Demand (AD) leads to...
higher money demanded, higher interest rate, and a fall in investment spending and some types of consumer spending (e.g. autos, home furnishings, and appliances)
What type of spending is most affected by the lowering of interest rates in the economy? Also state whether the spending is higher or lower as a result of lower interest rates.
Investment spending is most affected by changes in the interest rate. Investment spending will tend to fall with higher interest rates (all else remaining constant).
List 5 specific purchases that would be included as "investment" when calculating GDP = C + I + G + NX
Software for businesses, tractors for a business, new office equipment, new tools for a business to use, inventory investments...
In the long run, potential GDP (total real output of goods and services the economy is capable of producing ) is determined by what? List at least four factors/determinants.
Quantity of natural resources, quantity of labor, quantity of physical capital, the level of technology, and the level of human capital (accumulated via education, on the job experience, and job training)
Define the natural rate of unemployment
The unemployment rate at which (when all else is equal) it is neither rising nor dropping
How do you calculate the natural rate of unemployment?
Natural rate of unemployment = unemployment rate at full employment / GDP
What is included/taken into account for in the natural rate of unemployment?
Natural unemployment = structural unemployment + frictional unemployment + seasonal unemployment
What happens when the actual unemployment rate = the natural rate of unemployment?
Cyclical unemployment is equal to 0
List events that can shift the SRAS curve. Also indicate the direction of the shift (right or left)
Higher wages throughout the economy reduces AS (shift left), higher energy prices reduces AS (shift left), war/natural disaster destroys capital and lives (shift left), improvement in technology (shift right), emigration/population loss (shift left), favorable weather patterns that increase crop yield (shift right)
Discuss 3 primary reasons for the upward slope of the AS curve in the SHORT RUN
Sticky input prices, Inventory effect (movement along the SRAS curve caused by demand shocks - e.g. demand changes for a good that leads to a change in inventory levels), Menu effect (sub-point of inventory effect)
List 5 events that can shift the AD curve. Also indicate the direction of the shift.
1. Changes in government policy.
2. Changes in fiscal policy :
-increase in tax income (shift left)
-increase in G increases AD (shift right)
3. Monetary Policy
4. Faster Economic growth of our trading partners raises NX (shift right)
5. Improved consumer confidence raises C and increases AD (shift right)
Define monetary Policy
the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates - depending on what the current situation is. It involves managing interest rates and credit conditions, which influences the level of economic activity.
Give examples of monetary policy
expansionary monetary policy - lowers the discount rate of buying government securities - reductions in the reserve ratio
contractionary monetary policy - raises the discount rate of buying government securities - increases in the reserve ratio
Define Fiscal Policy
The setting of the level of government spending and taxation by the government policymakers
Give examples of fiscal policy
Aggregate demand is either rising or dropping, and the government regulates it by setting the level of spending and taxation
What actions does the FOMC take to stimulate the economy?
They tell their bond traders to buy bonds and deposit funds into the banking system, which then lowers the interest rates.
What actions does the FOMC take to slow down the economy?
They tell their bond traders to withdraw bonds/deposits from the banking system, which then increases interest rates.