AP EXAM: Unit 3

Question 1

What does the AD curve describe?

Answer 1

The relationship between the price level and the quantity of goods and services demanded in a country

Question 2

Wealth effect

Answer 2

Higher price levels reduce purchasing power

Question 3

Real interest rate effect

Answer 3

As price level increased, interest rates increase to ensure payback

Question 4

Net export effect

Answer 4

A change in the country’s average price level affects exports and imports flow

Question 5

What do the “effects” do?

Answer 5

They explain the negative slope of the AD curve.

Question 6

How can the spending multiplier be applied?

Answer 6

Quantifies the size of the change in AD as a result of a change in any component of AD

Question 7

Spending multiplier

Answer 7

A $1 change to one of the components of AD leads to a further change in total expenditures and output

Question 8

How does the tax multiplier make sense?

Answer 8

The initial change in taxes is “multiplied” throughout the economy by a factor determined by the amount by which households increase their consumption

Question 9

Relationship between MPC and spending multiplier

Answer 9

As the MPC decreases, the spending multiplier decreases

Question 10

Sum of marginal propensities

Answer 10

MPC + MPS = 1

Question 11

Marginal propensity to save formula

Answer 11

Change in savings over change in income

Question 12

Marginal propensity to consume formula

Answer 12

Change in consumption spending over change in income

Question 13

Expenditure multiplier

Answer 13

1 / 1-MPC

Question 14

Tax multiplier

Answer 14

1 - Expenditure multiplier, or -MPC/MPS

Question 15

Why is the tax multiplier negative?

Answer 15

Inverse relationship between taxes and spending

Question 16

Effect of tax multiplier

Answer 16

Change in AD = Initial change in taxes x tax multiplier

Question 17

Effect of spending multiplier

Answer 17

Change in AD = Initial change in spending x spending multiplier

Question 18

Sticky wages

Answer 18

Describes SRAS upward sloping curve, occurs because firms are unable to raise and lower wages quickly in response to a macroeconomic shock such as an increase or decrease in AD

Question 19

Relationship between price level and output/employment

Answer 19

When wages are sticky, there is a direct relationship between the price level and the level of output/employment

Question 20

Things that shift SRAS

Answer 20

Wage rates, resource costs, energy and transportation costs, government regulation, business taxes and subsidies, exchange rates

Question 21

Role of sticky wages with inflation and unemployment

Answer 21

Due to stickiness, there is a short run trade-off between inflation and unemployment

Question 22

What does the LRAS show?

Answer 22

The LRAS curve shows the level of output achieved in an economy when wages and prices are fully flexible and adjust to the economy’s price level

Question 23

Consequence of flexible long run prices/wages

Answer 23

Lack of a long run trade off between inflation and unemployment

Question 24

When does short run equilibrium occur?

Answer 24

Short run equilibrium occurs when the aggregate quantity of output demanded and the aggregate quantity of output supplied are equal

Question 25

What’s a situation in which an economy could produce beyond full employment?

Answer 25

They can produce beyond in short run due to stickiness of wages/input prices

Question 26

How do you calculate an output gap?

Answer 26

The difference between a curve shift and long run equilibrium

Question 27

What’s demand pull inflation?

Answer 27

Results when a component of AD increases when economy is at full run equilibrium

Question 28

What’s cost push inflation?

Answer 28

Results when a factor affecting SRAS causes the costs of production to increase