macro final 2011 (short run model)

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multiplier effect

tells us that a change in investment spending changes equilibrium GDP more than the change in investment

automatic stabilizers reduce fluctuations in GDP by

reducing the additional spending that occurs in each round of the multiplier

output level when AE line lies below the 45-degree line

aggregate expenditure is less than output so inventories will increase and output will be lowered

what happens when quantity of money demanded exceeds the quantity of money supplied? (public bonds, price of bonds, interest rate)

public will try to sell bonds, price will decrease, and interest rate will increase til equilibrium is reached

federal funds rate

determined in a market but targeted by the Fed, the interest rate that commercial banks charge each other for very short term loans

If the Fed sells bonds, what happens to money supply?

supply decreases, interest rate increases, autonomous consumption decreases, investment decreases, and GDP decreases

aggregate demand curve

gives the equilibrium price level of real GDP corresponding to a given price level

a decrease in price level leads to

money demand curve shifts leftward, interest rate drops, AE line shifts upward, movement upward along AD curve

if gov gives a big tax cut, what will happen to AE, MD, and AD

AE line shifts upward, MD curve shifts right, and AD curve shifts right

self-correcting mechanism for a negative demand shock

a decrease in wage rates will lead to a decrease in the price level so that economy returns to full employment

with Okun's law, when cyclical unemployment increases from 2 to 3 percent, the recessionary gap increases from...

4 to 6 %

the expenditure multiplier leads to greater than one for one changes in output when autonomous consumption changes because

direct changes in spending change the income of producers which leads to additional changes in spending

automatic stabilizers do what to government spending or taxes when real output increases

decreases gov spending or increases taxes

the nominal interest rate is above the equilibrium value so MD is - than money supply, bond prices will-, and the nominal interest rate will-

less, rise, decrease

According to the AS/AD model, in the long run, expansionary monetary policy wil

increase the price level and leave real GDP unchanged

to close a recessionary gap the Fed should

buy government bonds to increase bond prices and lower interest rates, causing consumption, investment spending, and AE to increase

in reference to short-term economic fluctuations, the "trough" refers to

the low point of economic activity prior to a recovery

the smaller the MPC, the - the income-expenditure multiplier and the - the effect of a change in autonomous spending on short run eq. output

smaller, smaller

if the money supply exceeds money demand, people will - bonds which will cause bond prices to - and the nominal interest rate to- until money demand equals money supply

buy, rise, fall

the federal reserve discount rate is the rate of interest charged on loans from - to -

the Federal reserve to commercial banks

a self correcting tendency of the economy means that expansionary gaps are eventually eliminated by

rising inflation

what is the short-run choice illustrated by the Phillips curve?

between unemployment and inflation


negative inflation rate

a shock in the economy is a change in

spending or production that initially affects one or more sectors and then spreads throughout the whole economy

if MPC is 0/75 and investment spending increases by $200 billion, by how much will equilibrium output increase?

$800 billion

examples of fed actions that could decrease money supply are making open market-? (sales or purchases, effect on required reserve ratio and discount rate)

sales, increasing the required reserve ratio, and increasing the discount rate

if quantity of money demanded is less than the quantity supplied at a given interest rate, what will happen to restore the market to eq.?

public will try to buy bonds, price of bonds will increase, interest rate will fall

increases/decreases in which of the following would shift the AD curve to the right? gov purchases, investment spending autonomous consumption, taxes, money supply

increases in gov purchases, investment spending, autonomous consumption, or the money supply

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