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Macro Unit 7 Study Guide
Terms in this set (46)
Explain 5 different actions the government can take to promote long run economic growth
Faster technological progress, rising productivity, a strong rule of law and political stability, increase in education, sustain resources
How is long-run economic growth shown on the production possibilities curve?
outward shift along the curve
What does a point inside the production possibilities curve show?
What does a point along the production possibilities curve show?
What does a point outside the production possibilities curve
What is the key source of growth in potential output?
What are ways that government can increase economic growth and potential output?
Fiscal and monetary policies
What is included in a nation's current account?
The balance of payments on the current account
plus the balance of payments on the financial account is equal to what?
What are the (4) shifters in the foreign exchange market?
taste, price level, income, interest rates
How do interest rates and inflation rates impact the international value of currency?
increases/decreases the demand for currency
What is the effect of high inflation in country
X? How will country X's currency and trade be affected?
decrease the demand for currency X, decrease exports increase imports
What is the relationship between interest rates and investment?
How will an increase in the
government budget deficit affect the real interest rate?
How does an increase in imports affect real GDP?
What causes demand-pull inflation?
increase aggregate demand
What may policies, that are designed to decrease demand-
pull inflation, increase?
Contraction fiscal/ monetary policies
What is the effect if a nation imports more goods and services than it exports?
causes a trade deficit
What determines exchange rates in a free floating system?
supply and demand
How are exchange rates determined in a fixed exchange system?
What is the effect on consumption and real GDP when there is an increase in the real interest rate?
consumption decreases, GDP decreases
What goods/services are counted in GDP?
C + G + I + NX
What is not counted in GDP?
intermediate goods, transfer payments and non-market activities, used goods, illegal goods
If there is a decrease in exports, how is Aggregate Demand affected?
decrease in AD
What policy could be used to "fix" this recessionary gap?
What is the effect of an increase in government investment in capital per worker?
increases long run growth
How can government increase productivity and output?
investing in human capital
If the U.S. dollar depreciates what will be the effect on imports and exports?
exports increase, imports decrease
What is the effect of an appreciating dollar?
exports decrease, imports increase
If the Federal Reserve pursues a contractionary monetary policy, what is the effect on the international value of the dollar, United States imports and exports?
appreciation of currency, Decreases exports and increases imports
What fiscal and monetary policy can be used to decrease inflation?
On the Phillips curve, what is the trade-offs between unemployment and inflation?
How will the international value of a nation's currency be affected by higher inflation rates?
If the government takes no policy action, how will current output move to potential output?
decrease in wages lower price increase wages
How do expansionary monetary policies affect interest rates?
What is the best fiscal and monetary policy to correct a severe recession?
expansionary fiscal policy
What is the effect on price level and output if there is a negative supply shock?
increases price level
What determines how much money a bank can loan out?
List the (4) parts of the typical business cycle.
Peak, Recession, Trough, Expansion
If the value of the dollar depreciates, how will exports and imports be affected?
exports increase, imports decrease
What causes the demand for money to increase?
If demand for a nation's export increase, what will be the effect on the value of their currency?
How is the unemployment rate determined?
#of people unemployed/labor force
What causes cost-push inflation?
a decrease in aggregate supply
If there is a fixed-interest rate and there is an increase in inflation, who gains and who is hurt?
Who gains with a decrease in unexpected inflation?
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Krugman's Economics for AP*
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Paul Krugman, Robin Wells
Essentials of Investments
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