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Unit 3 Midterm Exam Macroeconomics
Terms in this set (42)
Why is the aggregate demand curve downward sloping?
The Wealth Effect because higher prices reduce purchasing power of money
Interest Rate Effect because when PL increases, lenders need to charge higher interest rates to receive money back
Foreign Trade Effect because when PL in the U.S rises, foreigners buy less of our goods
What is aggregate demand?
Demand for all goods and services produced in an economy that buyers are willing and able to purchase at different PL
What is aggregate supply?
Supply of all goods and services produced in an economy that firms will produce in an economy at different PL
What are the shifters of supply?
R.A.P - resources, actions of Government, and productivity
The AD/AS model demonstrates the relationship between what ?
Price level (y-axis) and Real GDP (x-axis)
Define price level. What occurs if PL increases?
Price level is the average of current prices across the entire spectrum of goods and services produced in the economy. When price level rises, Aggregate Demand GDPr will fall (inflation) and if price level decreases, the real GDP demanded increases (deflation)
Expalin the differences between potential GDP and GDPr.
Potential GDP- potential GDP is an economy's manimum, ideal production with high employment across all sectors and maintaining currency and product price stability. What they COULD produce
Actual GDP- the actual measured economic output for a country over a given interval. What they CAN produce
Define output. What does the U.S use to measure output?
The quantity of goods or services produced in a given time period, by a firm, industry, or country "whether consumed or used for further production." It is measured by GDPr.
Explain how output and unemployment are connected.
Potential output measures the productivity capacity of the economy when unemployment is at its natural rate. It is not the maximum an economy could theoretically produce, but a sustainable number.
Label full employment output.
The full employment output is the "x" or the point that AD and AS meet at in equilibrium.
Define inflationary gap.
Infaltionary gap is the amount be which the actual GDPr exceeds full potential employment. The "x" point of AD/AS should be infront of LRAS on a graph.
Define recessionary gap.
when aggregate output is below potential output and the economy is operating at below full employment. The "x" point of AD/AS should be behind the LRAS on a graph.
Identify the factors that can cause long-run economic growth to shift LRAS
potential GDP increases overtime due to resources, an increase in machinery or equipment, and advancing technology (R.A.P)
Define inflation and unemployment
Inflation- the rising general level of prices which reduces the "purchasing power" of money
Unemployment- people not actively working or seeking a job
Explain the relationship between inflation and unemployment.
When the economy is overheating, there is low unemployment but high inflation.
When there is a recession, unemployment is high and inflation is low.
Explain the connections between AS/AD and Phillip's curve.
Increase or decrease in AD casues movement along the Phillip's curve, NO SHIFT.
Increasing in AS causes a decrease shift on short run-Phillip's curve and decrease in AS causes an increase in SRPC.
*SRPC will always move opposite of AS
Define full employment
the condition in which virtually all who are able and willing to work are employed.
Define cyclical unemployment
unemployment due to the natural rises and falls of the business cycle (recession or depression)
Explain the natural rate of unemployment
The natural rate of unemployment is the normal rate of unemployment, consisting of structural unemployment and frictional unemployment. The economy will always have an unemployment because consumers are getting fired from a job, or looking for a new one, and switching jobs.
Define deficit. Identify what occurs when there is a federal budget deficit.
Deficit- the amount by which something, especially a sum of money, is too small. A federal budget deciet happens when the government spend more than it collects in taxes in a single year; borrowing money.
Define the marginal propensity to consume.
How much people consume rather than save when there is change in income.
MPC= change in consumption / change in income
Define the marginal propensity to save.
How much people save rather than consume
MPS= change in savings/ change in income
Define the multiplier
one person's spending becomes another person's income. Multpier effect shows how spending is maginified in the economy.
Define the goverment spending multiplier. Identify the formula.
Represents the multiple by which GDP increases or decreases in responde to an increase or decrease in government expenditures and investment.
Spending Multiplier = 1/MPS or 1/1-MPC
Explain the major differences between classical economics and keynesian economics
Classical: Economy will FIX itself and reccesions are temporary. NO government involvement.
Keynesian: Wages are sticky-slow to adjust and in the short run, government SHOULD intervene to increase AD.
Identify and explain 5 problems associated with fiscal policy.
Deficit spending, problems of timing (recognition, administrative and operational lag), politically motivated polices (using inappropriate solutions to fix econmic gaps), crowding-out effect (gov. spending might cause unintended effects that weaken the impact of policy), and net export effect (international trade reduces the effectiveness of fiscal policy).
Define economic growth.
Increase in real output of an economy over time.
rate of growth = current GDPr - previous GDPr / previous GDPr x 100
Indentify growth and shifters of LRAS
R.A.P (increases in available resources, encouraging investments in capital, technology, nd productivity, and technology advances, increase/decrease in work force and education)
Economy is in equilibrium and consumer spending increases in the short run and
in the long run AS will decrease and output stays the same
An increase in which of following will promote economic growth
Investment tax credits. Investment is the only component that will shift AD, AS, and LRAS
Economy is in equilibrium and consumer spending decreases AD will decrease in the short run and
in the long run AS will increase and output stays the same
Fiscal policy is controlled by
Congress and the President
The two main tools of fiscal policy are
government spending and tax
The government should engage in expansionary fiscal policy when
the economy is in recession
The government should engage in contractionary fiscal policy when
the economy is in an inflationary gap
How does the government borrow money?
selling bonds and issuing securities
Every year the U.S. has a deficit it gets added to the
In a reccesion, the government could engage in expansionary policy by
reducing taxes and increasing government spending
In experiencing an inflationary gap, the government could engage in contractionary polcy by
increasing taxes and reducing government spending
The goal of expansionary fiscal policy is
BOOST AD through decreased taxes or increased gov. spending
The goal of contractionary fiscal policy is
REDUCE AD through increases taxes or decreased spending
money left after taking out taxes
Gross income - net taxes
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