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`
fed managing money supply and interest rates to pursue macro policy objectives
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
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 _____
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
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
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
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?
) A student who just graduated from college but has not found a job would most likely be
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 ________.
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
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.
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
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 ________.
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 ________.
As the economy nears the end of an expansion, interest rates usually ________ and wages raise more ________ than prices.
A recession begins with a(n) ________ in spending by firms on capital goods and a(n) ________ in spending on durable goods by households.
Between 1950 and 2009, the average length of recessions in the United States was
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
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 worked.
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
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.
equipment and structures like tools or office buildings
knowledge gained through education, training, and experience
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
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 _____
if dollar depreciates, AD ______
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
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
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?
sum of currency, checking account deposits, and travelers checks
M1 plus savings account, small denomination time deposits, money market deposit accts, non-institutional money market fund shares
credit cards: money or not?
debit cards: money or not?
increase in checking deposit formula
(1/reserve ratio)x initial deposit
fractional reserve banking system
banks keep less than 100% of deposits as reserves
loans the fed makes to banks
open market operations
buying and selling of treasury securities by the fed