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aggregate demand curve shows relationship between

price level and planned aggregate expenditures by households, firms, and the government

4 components of aggregate demand

consumption, investment, government purchases, net exports

if price level changes but all else remains constant, economy will

move up or down a stationary agregate demand curve

if any other variable but price level changes, aggregate demand will


three things that can cause aggregate demand to shift

changes in govt policies, chanes in expectations of households and firms, changes in foreign variables`

monetary policy

fed managing money supply and interest rates to pursue macro policy objectives

fiscal policy

changes in federal taxes and purchases intended to achieve macro policy objectives

aggregate demand curve is downward sloping because

an increase in the price level reduces real money holdings

wealth effect

when price level falls, real value of household wealth rises

international trade effect

increase in price level will lower net exports

which aggregate supply curve has a positive slope?

short run only

if full-employment GDP is equal to $4.2 trillion, what does LRAS look like?

vertical line at $4.2 trillion of GDP

decrease in aggregate demand in the economy will have what effect on equil in the long run?

price level will fall and level of GDP will be unaffected

most common cause of inflation?

total spending increases faster than total production and aggregate demand increases by more than long run aggregate demand

when economy enters a recession, your employer is _______ to reduce your wages because _____

unlikely; output and input prices generally fall during recession

if short run aggregate supply increases (shifts to the right) by less than long run aggregate supply, then, at the short run equilibrium,

GDP will be below potential GDP

meanings of each of variables in irving fischers quantity equation?

M = m1 definition of money supply, V = average number of times a dollar is spent on goods and services, P = GDP deflator

fischers quantity equation


saying "my iphone is worth $300 represents moneys function as

a unit of account

if penny was made worth 5 cents, effect on M1>

it would rise

if a person withdraws from their savings and puts it in checking, M1 will _____ and m2 will _____

increase;not change

if credit card balances rise in the economy, M1 will _____ and M2 will _____

not change; not change

the required reserves of a bank equal its _____ the required reserve ratio

deposits multiplied by

to prevent another bank panic, ____ was created

Federal Deposit Insurance Corporation

main monetary policy tools used by Fed to manage money supply

open market operations, discount policy, reserve requirements

process of bundling loans together and buying and selling these bundles


quantity equation

money supply times the velocity of money equals price level times real output

quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP

there is a strong link between changes in the money supply and inflation in _____ run


dual mandate of the fed

maintaining price stability and high employment; most important goals mentioned explicitly in the Employment Act of 1946

what do economists mean by the demand for money?

amount of money - currency and checking account deposits - that individuals hold

when Federal Open Market Committee decides to increase money supply, it ____ US securities.


when Federal Open Market Committee decides to decrease money supply, it ____ US securities.


an increase in interest rates affects aggregate demand by

shifting curve to the left, reducing real GDP and lowering price level

as interest rate increases, _____

consumption, investment, and next exports decrease, aggregate demand decreases

if Fed believes economy is about to fall into recession, it should

use an expansionary monetary policy to lower interest rate and shift AD to the right

if Fed believes inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left

Operation Twist

Fed's program to purchase $400 billion in long term treasury securities while selling an equal amount of shorter term treasury securities

an increase in the money supply in the US will not

cause value of investing in US financial assets to become more desirable to foreign investors

spending and taxes increasing/decreasing with business cycle

automatic stabilizers

expansionary fiscal policy

includes increasing govt spending and decreasing taxes to increase AD

contractionary fiscal policy

includes decreasing govt spending and increasing taxes to increase AD

E/C corporate income tax is increased


E/C defense spending is increased


E/C Fed lowers the target for the federal funds rate


E/C families are allowed to deduct all their expenses for daycare form their federal income taxes


E/C individual income tax is decreased


E/C new highway is built to expand employment


if govt increases expenditure without raising taxes, this will...

increase budget deficit and require govt to borrow more and cause interest rates to increase, reducing private investment and crowding out private sector

cyclically adjusted budget deficit/surplus

deficit/ surplus in federal govt's budget if the economy were at potential GDP

federal budget deficit

year to year shortfall in tax revenues relative to govt spending (T< G + TR), financed through govt bonds

federal govt debt

accumulation of all past deficits

how does budget deficit act as an automatic stabilizer to reduce severity of a recession?

transfer payments to households increase, consumers spend more, tax obligations fall due to falling wages and profits

The advice to "keep searching, there are plenty of jobs around here for which you are qualified", would be most appropriate for which of the following types of unemployment?

frictional unemployment

) A student who just graduated from college but has not found a job would most likely be

frictionally unemployed

According to the text, economists consider full employment to occur when

the unemployment rate consists of only frictional and structural unemployment.

The natural rate of unemployment is the amount of unemployment

equal to frictional plus structural unemployment.

If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would


If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our measure of inflation on

producer price index

The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is


If your nominal wage rises faster than the price level, we can say your real wage has ________ ______ and the purchasing power of your income has ________.

risen; risen

When deflation occurs, _____ interest rate is _____ than ______ interest rate

real; greater; nominal

Which of the following describes a situation in which the person is hurt by inflation?

person paid a fixed income during an inflationary period

The cost to firms of changing prices

menu cost

The recession of 2007-2009 had different effects on various sectors of the economy. Which of the following sectors of the U.S. economy had the highest unemployment rate in April 2009, topping 15 percent?


T/F If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided.


The real wage equals the nominal wage ________ the CPI, all times 100.

divided by

T/F Housing is the largest component of the U.S. CPI market basket.


The best measure of the standard of living is

real GDP per capita

Labor productivity will increase if the ________ increases and ________.

quantity of capital per hour worked; technology improves

T/F Potential GDP is always greater than real GDP in an economy.


examples of financial intermediaries

insurance companies, banks, pension funds

In a closed economy, I =

Y - C - G.

Public saving in the economy can be increased by

raising taxes

In a closed economy, what is the relationship between saving and investment?

Investment is equal to saving.

When the government runs a deficit, what is the equation?

T < G + TR

if axes are less than transfers plus government spending, then

there is public dissaving

The budget deficit is defined as

T - (G + TR), and this is negative.

An increase in the real interest rate does which of the following?

reduces consumption spending

A decrease in the real interest rate will

increase consumption and investment

The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to saving, and the ________ the quantity of loanable funds supplied.

positive; greater; greater

Equilibrium in the loanable funds market determines

real interest rate

If technological change increases the profitability of new investments for firms, then the ________ curve for loanable funds will shift to the ________.

demand; right

When the economy reaches a trough in a business cycle, which of the following will occur?

Income, production, and employment will begin to rise.

The Business Cycle Dating Committee, a part of the ________, officially decides when a recession begins and ends.

National Bureau of Economic Research

A(n) ________ comes to an end with a business cycle ________.

recession; trough

As the economy nears the end of an expansion, interest rates usually ________ and wages raise more ________ than prices.

rise; rapidly

A recession begins with a(n) ________ in spending by firms on capital goods and a(n) ________ in spending on durable goods by households.

decrease; decrease

Between 1950 and 2009, the average length of recessions in the United States was

ten months

If you spend more of your income on consumption goods, which of the following will occur?

The production of investment goods will fall.

Economists point to the "pro-growth" policies of the government of which African country in explaining a high growth rate relative to other African countries?


Potential GDP is defined as

the level of GDP attained when all firms are producing at capacity.

Growth in real GDP per capita for the world economy was greatest during

twentieth century

When an economy faces diminishing returns,

the slope of the per-worker production function becomes flatter as capital per hour worked increases.

If the per-worker production function shifts down,

it now takes more capital per hour worked to get the same amount of real GDP per hour

Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if

here is technological change.

According to new growth theory,

knowledge capital is subject to increasing returns

Creative destruction means that

firms develop new products that replace old products in the economy, thereby encouraging
economic growth.

The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending

Which of the following is one explanation as to why the aggregate demand curve slopes downward?

Decreases in the price level raise real wealth and increase consumption spending.

deflation will increase

quantity of real GDP demanded

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

will shift AD curve to the left

If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

will shift curve to the right

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The price level will fall, and the level of GDP will be unaffected.

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

an automatic mechanism.

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

a housing bubble

In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS

inflation occurs

T/F Inflation is generally the result of total spending growing faster than total production.


The shape of long-run aggregate supply curve


Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity

In an economy with ________, there are more prices than in an economy with ________.


Which of the following functions of money would be violated if inflation were high?

store of value


the amount of goods and services that a worker can produce from each hour of work.

physical capital

equipment and structures like tools or office buildings

human capital

knowledge gained through education, training, and experience

equity financing

sale of stocks

at end of an expansion, wages are _____


during recessions, inflation rates usually ______



The process by which poorer countries catch up with richer countries in terms of real GDP per capita

for aggregate demand model, _____ is on horizontal axis and _____ is on vertical

real GDP; price level

what is aggregate demand?

quantity demanded by everyone at certain prices

what is included in aggregate demand?

consumption, investment, govt spending, net exports

3 reasons AD curve is downward sloping

real balance/wealth effect, interest rate effect, international trade effect

wealth effect

if you have more money, you buy more stuff

interest rate effect

more saving increases credit supply, lowers interest rate, households borrow more at lower interest rates, buy more goods

international trade effect

if price level falls in US, foreigners and US citizens will buy more US products

for AD curve, a change in real GDP demanded is what movement?

movement along the AD curve

things that can cause AD curve to shift

changes in govt policies, changes in expectations of households and firms, change in foreign variables

factors that change consumption

wealth, expectations, interest rate, income taxes

factors that change investment

interest rate, expectations about future sales, business taxes

if interest goes down, AD _____

goes down

if dollar depreciates, AD ______

goes up

short run AS curve slopes ____


why is SRAS curve sloping upward?

sticky wages, firms are slow to adjust wages, menu costs make prices sticky

what shifts SRAS curve?

increase in labor force, technological changes, expected changes in future price level

natural real GDP

real GDP produced at natural unemployment rate

each year, LRAS _____

moves to the right


period of recession and inflation resulting from a supply shock

in long run equilibrium, Qdem of real GDP is _______ natural GDP

equal to

in short run equilibrium, Qdem of real GDP is _______ natural GDP

more or less than

most common cause of inflation

total spending increasing faster than total production

keynsian believes govt should/should not be involved in fixing depressions and recessions

govt intervention is a must

example of commodity money

gold coin

what is fiat money?

money that has value because the govt says so. so, the dollar. just a piece of

which is narrower definition, M1 or M2?


M1 definition

sum of currency, checking account deposits, and travelers checks

M2 definition

M1 plus savings account, small denomination time deposits, money market deposit accts, non-institutional money market fund shares

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