question

The aggregate demand curve slopes downward to the right for the following reasons:

answer

1.) the real balance effect 2.) the interest rate effect 3.) the international trade effect

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Ceteris Paribus, short-run aggregate supply decreases in response to:

answer

An increase in the price of a major input, such as oil

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Adverse supply shocks lead to:

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A higher price level at a lower level of output (real GDP)

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If aggregate demand increases and short-run aggregate supply is horizontal, the price level ___________, real GDP ________, and the unemployment rate _________

answer

Stays the same, increases, decreases

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The real balance effect refers to the:

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increase in the purchasing power of a given sum of money that occurs when the price level decreases

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If SRAS is upward sloping, an increase in AD will:

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Increase both real GDP and price level

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How does the economy self correct an inflationary gap?

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Over employed resources push up input prices, cost of production increase, and the short-run aggregate supply curve shifts to the left

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The long run aggregate supply curve is:

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Vertical at the output level associated with the natural rate of unemployment (full employment)

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What would cause AD to shift to the right?

answer

An increase in disposable personal income

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If the actual unemployment rate is greater than the natural unemployment rate:

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A recessionary gap exists and there is a surplus of labor

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Economists that believe the economy is self regulating advocate:

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A policy of Laissez-Faire

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This statement is not consistent with classical reasoning:

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Macroeconomics equilibrium is likely to remain at less than full employment

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The notion that whatever is produced will be consumed so that a general overproduction of goods and services is not possible is:

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Say's Law and is associated with the Classical view

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Autonomous consumption:

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Is consumption spending when disposable income is 0

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Savings is equal to 0 when disposable income is:

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equal to consumption spending.

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The formal to find the marginal propensity to consume (MPC):

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the ratio of the change in consumption to the change in disposable income

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The formal to find the marginal propensity to save (MPS):

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MPC + MPS = 1

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Break-even disposable income:

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is the level of disposable income where consumption spending is just equal to disposable income

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What is the consumption function:

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Consumer Spending = Autonomous spending + Marginal Propensity to consume * Disposable income. C = A +MPC(Yd)

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In the Keneysian model, the primary determinant of consumption spending is _________ and the primary determinant of saving is _________

answer

Disposable income; Disposable income

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If total production in the economy exceeds total expenditures, then:

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Businesses experience unplanned inventory increases, cut production, and income and full employment

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When businesses become more optimistic about future sales and profits:

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Investment spending increases and and aggregate demand increases

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According to Keynes, the depression economy of the 1930's was not likely to rapidly correct itself due to:

answer

Prices and wages were not flexible downward

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According to the Keynesian model of the macroeconomy, the most effective means for closing a recessionary gap is:

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Increase in Government spending which shift AD

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Aggregate demand is likely to increase or shift to the right as a result of a(n) _________ in government spending, a(n) _________ in taxes, or a(n) _________ in the interest rate.

answer

Increase, decrease, decrease

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In the short run, a rightward shift of aggregate demand results in a(n) __________ in the equilibrium price level, a(n) __________ in equilibrium output, and a(n) __________ in the rate of unemployment.

answer

Increase, increase, decrease

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If TE < TP

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then businesses will experience unintended inventory accumulation and will reduce total production.

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If TE > TP

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then businesses will experience unintended inventory depletion and will increase total production.

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What are the 3 tools the FED uses to regulate the economy?

answer

1.) Reserve requirements 2.) the discount rate 3.) open market operations

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Describe Expansionary fiscal policy

answer

The Fed is most likely to pursue an expansionary monetary policy, also called easy money policy, if the economy is slowing down or in a recession. Buying bonds in the open market; Lowering the discount rate; Decreasing the fed funds rate target; Lowering the required reserve ratio

question

Describe Contractionary fiscal policy

answer

If an inflationary gap exists, government could use contractionary fiscal policy to decrease aggregate demand. Selling bonds in the open market; Raising the discount rate; Increasing the fed funds rate target; Raising the required reserve ratio

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A budget deficit

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exists when government expenditures exceed net taxes (G > T)

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A budget surplus

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exists when net taxes exceed government expenditures (G < T)

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A balanced budget

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exists when government expenditures equal net taxes (G = T)

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The change in equilibrium income that occurs as a result of an increase in government spending is found by using the formula:

answer

change in Y = (1/MPS)(change in G)

question

What are the 3 functions of money:

answer

1.) Medium of exchange- People use money as a medium of exchange whenever they make purchases (replaces bartering) 2.) unit of account - money acts a common denominator for comparing the relative values of goods and services. 3.) Store of value - money serves as a store of value, because it stores purchasing power over time and can be used for future purchases.

question

Why do people continue to use money even thought it loses value due to inflation?

answer

Liquidity - he ease with which an asset can be converted into a medium of exchange (cash) without loss of value. Money is the most liquid of all assets because it is already a medium of exchange.

question

Formula to solve for M1

answer

M1 = currency held by the public + demand and other + traveler's checks checkable deposits

question

Formula to solve for M2

answer

M2 = M1 + savings deposits + small denomination time deposits + retail money funds

question

fractional reserve banking system

answer

banks are required to hold only a small fraction of their total deposits on reserve. In the U.S., bank reserves can legally be in the form of cash in a bank's vault or as deposits at a Federal Reserve Bank.The fraction of deposits that must be held as reserves is called required reserves.

question

How to banks create money?

answer

When the public makes deposits in a bank, the bank gains reserves. Since the bank must retain only a small fraction of these reserves, the rest (excess reserves) may be loaned out. Whenever banks make loans using excess reserves, money is created.

question

Actual or Total Bank Reserves (R)

answer

consist of cash in the bank's vault and deposits at the Federal Reserve Bank.

question

Required Reserves (RR)

answer

the required reserve ratio x Total Deposits = (r)(D)

question

Excess Reserves (ER)

answer

Total Bank Reserves - Required Reserves = R - RR

question

Simple deposit multiplier

answer

is equal to one divided by the required reserve ratio, or 1/r

question

Potential deposit creation

answer

is equal to the change in excess reserves (change in ER) times the simple deposit multiplier (1/r).

question

Monetary policy

answer

refers to actions by a central bank, such as the Federal Reserve, to control the flow of money and credit through the economy in order to help promote national economic goals.

question

Federal Reserve district banks perform several functions, including:

answer

1) issuing new currency 2) providing check-clearing services 3) holding depository institutions' reserve accounts 4) making discount loans to banks 5) collecting data on business conditions within their district 6) researching topics related to monetary policy.

question

The Board of Governors of the Federal Reserve System

answer

consists of seven members. Governors are appointed by the President (with Senate confirmation) to 14-year, nonrenewable, staggered terms and must come from different Federal Reserve districts to ensure that one area of the country will not be overrepresented.

question

The Federal Open Market Committee (FOMC)

answer

holds eight regularly scheduled meetings a year in Washington, D.C., to make decisions regarding the conduct of open market operations, the main tool for conducting monetary policy.

question

Laffer curve

answer

tax revenue increases as the tax rate increases, hits a maximum, T*, and then begins to decrease beyond some relatively high tax rate, such as t*

question

Crowding out

answer

Crowding out occurs when increased public sector activity reduces, or crowds out, private sector activity. The greater the degree of crowding out, the less effective fiscal policy will be for stimulating the economy.

question

automatic stabilizers

answer

are features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to dampen fluctuations in real GDP.f

question

A $100 billion increase in government spending when the MPC is 0.75 may lead to:

answer

An increase in equilibrium real GDP by a maximum of $400 billion

question

The Laffer curve suggests:

answer

There is some tax rate that maximizes tax revenue

question

Decreasing marginal tax rates as a means to increase incentives to work, save, and invest is most closely associated with the:

answer

Supply-Siders

question

Increases in government spending that lead to decreases in private sector activity refer to:

answer

Crowding out which tends to decrease the effectiveness of fiscal policy

question

A proportional, or flat tax system, is one in which:

answer

All tax payers pay the same percentage of income in taxes, regardless of income.

question

A proportional income tax:

answer

is one with a constant average tax rate. For example, if every person paid exactly 19 percent of income in taxes, the income tax would be proportional.

question

A progressive income tax:

answer

meaning that the average tax rate increases as income increases. Families with relative low incomes pay a small percentage of their income in taxes, while families with higher incomes pay a higher average tax rate.

question

A regressive income tax:

answer

A tax is regressive if the average tax rate falls as income rises.

question

If the Federal government passes a budge for which government spending exceeds tax revenue at full employment, then:

answer

A structural deficit exists

question

An increase in government unemployment compensation payments that occurs in response to a downturn in overall economic activity is an example of:

answer

An Automatic stabilizer

question

If the tax liability is $2,200 when income is $20,000 and $4,800 when income is $40,000 the income tax structure is:

answer

Progressive

question

The national debt is:

answer

The sum total of what the federal government owes its creditors

question

When tax receipts exceed government expenditures during a single year, the result is:

answer

A budget surplus

question

Full employment

answer

When the rate of unemployment is equal to the natural rate (about 4-6%)

question

Economic growth

answer

rate of growth measured as the percent change in real GDP

question

How the Bureau of Labor Statistics (BLS) conducts surveys and gathers information each month to estimate the rate of unemployment

answer

Data is derived from the current population survey (CPS).

question

Labor Force

answer

Includes people over the age of 16 who are working or actively seeking employment. Excludes members of the military of those who are institutionalized

question

The three categories of employment:

answer

Employed, unemployed, not in the labor force

question

Unemployment

answer

Is the inability of labor force participants to find a job

question

Unemployment rate:

answer

Number of unemployed / Labor force X 100

question

Frictional unemployment

answer

Available workers who are currently stuck in the interviewing/hiring process

question

Structural unemployment

answer

Occurs when there is a mismatch between skills or location of the people looking and the skill or location of available jobs

question

Cyclical unemployment

answer

Unemployment above the natural rate, occurs during a recession

question

Phantom unemployment

answer

people who claim to be unemployed (actively seeking work), when in fact they are not. he motivation for making a false claim may be that these individuals are currently receiving unemployment benefits.

question

Discouraged workers

answer

people who are willing and able to work, but have given up actively seeking employment due to lack of success.

question

The natural rate of unemployment

answer

Natural unemployment is achieved when the economy is in full employment. The natural rate of unemployment is between 4-6%. There will always be a percent of the work force leaving previous jobs and looking for new ones.

question

What is true about Cyclical unemployment when the actual unemployment rate is equal to the natural unemployment rate:

answer

When the economy is at full employment, the actual rate of unemployment is equal to the natural rate of unemployment, and cyclical unemployment is 0. Cyclical unemployment is associated with unemployment above the natural rate, and is considered a symptom of an economic recession

question

Define inflation and calculate the inflation rate given CPI values

answer

Consumer Price Index (CPI) is the measure of change in the price of goods and services over time. Inflation is a persistent increase in the price of goods. The annual inflation rate = CPI2 - CPI1 / CPI1 X 100

question

Define GDP

answer

Gross Domestic Product (GDP) is the total market value of all final good and services produced by domestically located resources during a one year period

question

Formula to find GDP

answer

GDP = C + I + G (EX-IM)

question

Formula to find NDP (net domestic product)

answer

NDP = GDP - depreciation

question

Define aggregate demand and explain why the AD curve is downward slopping

answer

Aggregate Demand (AD) is the relationship between the quantity demanded of all goods and services and the price level. The relationship between the price level and the quantity demanded is inverse, so the AD curve is downward slopping for 3 reasons.

question

The 3 reasons the AD curve is downward slopping:

answer

1.) real balance wealth effect - wealth increases as price level decreases 2.) interest rate effect - higher price level leads to higher interest rates, which in turn reduce the quantity demanded 3.) international trade effect - people will buy whatever good is cheaper - foreign of domestic

question

Explain how various economic events cause the AD curve to shift

answer

An increase in AD is shown as a rightward shift. Shifts in AD are not caused by change in price. An increase in the household wealth leads to a shift along the AD curve. Lower interest rates cause AD to shift to the right. When consumers are confident about the future, AD will shift to the right.

question

Explain the difference between the Short Run Aggregate Supply (SRAS) and the Long Run Aggregate Supply (LRAS) curve.

answer

SRAS assumes that the level of capital is fixed. SRAS is affected by costs of production. The SRAS curve is drawn assuming input prices are fixed, and when input prices change, the result is a shift in the SRAS curve. The LRAS curve is vertical at full employment. The LRAS curve is determined by al factors of production.

question

Why is the LRAS curve drawn as a vertical line at full employment

answer

Natural GDP depends on real factors, such as technology and worker productivity and net price level, which is why LRAS is vertical

question

Use the AD model to illustrate macroeconomic equilibrium and show how equilibrium is changed when aggregate demand shift or when aggregate demand supply shifts

answer

Occurs when quantity demanded = quantity supplied. On a graph, where aggregate demand intersects aggregate supply. Short-run equilibrium occurs at the intersection of the AD curve and SRAS curve. Long-Run equilibrium occurs at the intersection of the AD, SRAS, and LRAS curve.

question

Say's law

answer

Supply creates its own demand

question

Classical model of economics

answer

Classical theorists believed the economy is self regulating. Assumes prices, wages and interest rates are flexible.

question

Are prices assumed to be perfectly flexible in the short run or in the long run?

answer

In the short run, the price level of the economy is sticky or fixed. In the long run, the price level for the economy is completely flexible.

question

Define and graphically illustrate a recessionary gap

answer

A recessionary gap occurs when businesses cut back production and lay off employees because people are not spending enough to keep up with outputs. On a graph, LRAS is to the RIGHT of the SRAS/AD intersection. LRAS to the RIGHT = Recessionary

question

Define and graphically illustrate a inflationary gap

answer

On a graph, LRAS is to the LEFT of the SRAS/AD intersection. LRAS to the LEFT = inflationary

question

The consumption function

answer

C = A + MPC(Yd)

question

Autonomous consumption

answer

Consumption when income is 0

question

Marginal Propensity to Consume (MPC)

answer

Ratio of change in consumption to change in income

question

Marginal Propensity to Save (MPS)

answer

Money not spent is saved. MPC + MPS = 1

question

Break even

answer

When income is equal to consumption

question

Use the consumption function and the value of autonomous investment spending to calculate the equilibrium value of income and spending

answer

Consumption Function + Investments = equilibrium

question

Total Expenditures = Total Production

answer

Equilibrium

question

The investment spending multiplier

answer

Change in Y / Change in I = 1 / MPS

question

The government spending multiplier

answer

change in Y = (1 / MPS) ( Change in G)

question

National Debt

answer

Total debt owned by a nation

question

Budget Deficit

answer

Debt accumulated within in 1 year - how much over the budget was spent

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