AP Macroeconomics: Chapter 10 & 11 Review Questions – Flashcards
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At a particular price level, domestic output demanded is greater than that produced resulting in a shortage causing the price level to _______________________.
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Increase
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Provide an example of contractionary fiscal policy that would satisfy a conservative.
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Less government spending
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When both AD and AS shift to the right, how will the equilibrium price and the equilibrium quantity be affected?
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Output increases, price is indeterminate
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In the AS-AD model, what shift illustrates cost-push inflation?
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AS goes to the left
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Tax structure in which the percent of one's income taxed increases as their income increases.
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Progressive
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If the MPC is 2/3 and there is a negative GDP gap of $27 billion, what could Congress do to close the gap?
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Increase government spending by 9 million
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Type of lag that occurs as Congress decides how to best address recessionary symptoms.
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Administrative
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When the standardized surplus increases from year 1 to year 2, fiscal policy must be _______________________.
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Contractionary
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Vertical line at full employment output symbolizes _______________________.
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Long-run AS Curve
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If I have 7 employees, pay them $5 a day, and their total output is 14 pairs of shoes, what is per-unit production cost? What is productivity?
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$2.50, 2
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What type of budget measures taxing and government spending when the economy is at full-employment?
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Standardized budget
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Expectations, household debt, and personal taxes all affect which component of AD?
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Consumer Spending
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1 of 3 reasons for downsloping AD curve; assets return less at higher price level.
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Real Balances Effect
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When the economy is significantly below full employment output what does the AS curve look like?
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Flat
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Government spending during a recession causes internet rates to rise and private investment to decline. This concept is known as ______________________.
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Crowding-out
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Menu costs, efficiency wages, minimum wage, and fear of price wars are all explanations for what belief?
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Ratchet-effect
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A sharp rise in the stock market leads to an increase in spending; what determinant of consumption does this effect?
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Wealth
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Portion of GDP that goes to foreigners as interest payments; burden on future generations?
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External Public Debt
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Why is the aggregate-demand curve down sloping?
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- Real-balances effect - Interest-rate effect - Foreign purchases effect
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What are the determinants of AD?
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1) Consumer Spending: consumer wealth, consumer expectations, household debt, personal taxes 2) Investment Spending: real interest rates, expected returns 3) Government Spending 4) Net Export Spending: national income abroad, exchange rates
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Why is aggregate supply upsloping in the short-run?
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Nominal wages and input prices adjust only slowly to changes in the price level
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What are the determinants of AS?
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- Changes in the price of inputs for production - Changes in productivity - Changes in the legal and institutional environment in the economy: decrease in business taxes, increase in business subsidies, decrease in government regulation
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Impact of an increase in AD.
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An increase in the price level beyond the full-employment level of output; associated with demand-pull
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Impact of an increase in AS.
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Arising from an increase in productivity has the beneficial effect of improving real domestic output and employment while maintaining a stable price level.
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Impact of a decrease in AD.
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Reduces real output and increases cyclical unemployment, but it may not decrease the price level.
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Impact of a decrease in AS.
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There will be a decrease in real domestic output (economic growth) and employment along with a rise in the price level, or cost push inflation.
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Why does the economy experience a GDP gap with no deflation?
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The price level is inflexible downward
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How to enforce expansionary fiscal policy.
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Stimulate economy by increasing aggregate demand by either increasing government spending or tax reductions
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How to enforce contractionary fiscal policy.
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Reduce aggregate demand pressures that increase the price level by either decreased government spending or tax increases.
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In the case of a budget deficit, the standardized budget
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1) removes the cyclical deficit that is produced by swings in the business cycle 2) reveals the size of the standardized deficit, indicating how expansionary the fiscal policy was that year
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The crowding-out effect may be small and can be offset by an expansion in the __________________________.
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Money Supply
