CH5 Flashcards
AN INCREASE (SHIFT RIGHT) IN AGGREGATE DEMAND CAUSES:
AN INCREASE IN THE PRICE LEVEL AND AN INCREASE IN REAL GDP.
-AN INCREASE IN AGGREGATE DEMAND CAUSES THE EQUILIBRIUM PRICE LEVEL TO RISE AND EQUILIBRIUM OUTPUT (REAL GDP) TO INCREASE.
A THROUGH OF A BUSINESS CYCLE IS????
- UNUSED PRODUCTIVE CAPACITY AND AN UNWILLINGNESS TO RISK INVESTMENT
- THE TROUGH OF A BUSINESS CYCLE IS AN ECONOMIC LOW POINT WITH NO POSITIVE INDICATORS FOR THE FUTURE. IT IS CHARACTERIZED BY UNUSED PRODUCTIVE CAPACITY AND AN UNWILLINGNESS TO RISK NEW INVESTMENTS.
- FIRMS ARE ALSO LIKELY TO EXPERIENCE SIGNIFICANT EXCESS PRODUCTION CAPACITY, LEADING THEM TO REDUCE THE SIZE OF THEIR WORKFORCE AND CUTS COTS.
- A THROUGH IS A LOW POINT OF ECONOMIC ACTIVITY. AT THIS POINT OF THE BUSINESS CYCLE, FIRM PROFITS ARE LIKELY TO BE AT THEIR LOWEST LEVEL.
RECESSION
POTENTIAL OUTPUT WILL EXCEED ACTUAL OUTPUT.
- DURING A RECESSION, POTENTIAL OUTPUT (REAL GDP) WILL EXCEED ACTUAL OUTPUT (REAL GDP)
- OCCURS WHEN THE ECONOMY EXPERIENCES NEGATIVE REAL ECONOMIC GROWTH (DECLINES IN NATIONAL OUTPUT).
- ALSO DEFINED AS TWO CONSECUTIVE QUARTERS OF FALLING NATIONAL OUTPUT. .
- DURING A RECESSION, FIRMS TEND TO FALL AND MANY FIRMS INCUR LOSSES. FIRMS ARE ALSO LIKELY TO HAVE EXCESS CAPACITY. RESOURCES ARE LIKELY TO BE UNDERUTILIZED AND UNEMPLOYMENT IS LIKELY TO BE HIGH.
A RECESSION CAN BE CAUSED BY
- AN DECREASE IN AGREGATE SUPPLY AND A DECREASE IN AGREGATE DEMAND.
- A RECESSION IS DEFINED AS A PERIOD OF FALLING GDP AND RISING UNEMPLOYMENT.
- GDP WILL FALL IF THERE IS A DECREASE IN AD OR DECREASE IN AS
EXPANSION
IS A PERIOD DURING WHICH REAL GDP IS RISING AND UNEMPLOYMENT IS FALLING
- AN EXPANSIONARY PHASE IS CHARACTERIZED BY RISING ECONOMIC ACTIVITY REAL GDP AND GROWTH. .
- DURING AN EXP PHASE, ECONOMIC ACTIVITY IS RISING ABOVE ITS LONG-TERM GROWTH TREND.
- FIRMS PROFITS ARE LIKELY TO BE RISING DURIGN AN EXP PHASE AND DEMAND FOR GOODS AND SERVICES INCREASES.
- FIRMS ARE ALSO LIKELY TO INCREASE THE SIZE OF THE WORKFORCE DURING AN EXPANSION, AND THE PRICE OF GOODS AND SERVICES ARE LIKELY TO BE RISING.
WHAT WOULD BE CONSIDERED THE MOST EXPANSIONARY SET OF FISCAL POLICIES
-INCREASE IN GOVERNMENT PURCHASES AND DECREASE IN TAXES.
MONETARY POLICY
IS AN INCREASE IN THE MONEY SUPPLY
FISCAL POLICY
IS THE USE OF GOVERNMENT SPENDING AND TAXATION POLICIES TO PROMOTE:
- PRICE STABILITY
- FULL EMPLOYMENT
- ECONOMIC GROWHT.
MONETARY POLICY
IS THE SETTING OF THE MONEY SUPPLY BY THE FED THROUGH THE USE OF MONETARY POLICY TOOLS TO PROMOTE:
- FULL EMPLOYMENT
- PRICE STABILITY
CONTRACTIONARY MONETARY POLICY
IS THE REDUCTION OF MONEY SUPPLY BY THE FED.
EXAPANSIONARY MONETARY POLICY
IS THE EXPANSION OF MONEY SUPPLY BY THE FED.
AN INCREASE IN GOVERNMENT SPENDING WILL TEND TO CAUSE
- REAL GDP TO INCREASE AND UNEMPLOYMENT TO DECREASE.
- AN INCREASE IN GOVT SPENDING CAUSES AN INCREASE IN AD SHIFTS TO THE RIGHT. AS A RESULT IN GOVT SPENDING CAUSES REAL GDP TO RISE AND UNEMPLOYMENT TO FALL.
AN INCREASE IN PERSONAL INCOME TAX WILL TEND TO CAUSE–
REAL GDP TO FALL AND UNEMPLOYMENT TO RISE
NORMAL SEQUENCE OF A BUSINESS CYCLE
- EXPANSION
- PEAK
- CONTRACTION
- TROUGH
WITHIN THE FRAMEWORK OF THE AD AND AS , AN INCREASE IN SHORT RUN AGGREGATE SUPPLY WILL CAUSE
-REAL OUTPUT TO EXPAND AND PRICE LEVEL TO FALL.
IF AN ECONOMY IS CURRENTLY EXPERIENCING BOTH FULL EMPLOYMENT AND PRICE STABILITY, A MAJOR TAX REDUCTION WILL PROBABLY CAUSE:
- AN ACCELERATION IN THE INFLATION RATE, UNLESS GOVERNMENT EXPENDITURES ARE ALSO REDUCED.
- A TAX CUT SHIFTS THE AD CURVE TO THE RIGHT CAUSING THE PRICE LEVEL AND THEREFORE INFLATION RATE TO RISE.
IF US DOLLARS INCREASES IN VALUE RELATIVE TO THE OTHER MAJOR CURRENCIES, AGGREGATE DEMAND SHOULD…..
- DECREASE AS US GOODS BECOME LESS ATTRACTIVE OVERSEAS.
- IF THE DOLLAR GAINS IN VALUE, NET EXPORTS WILL SUFFER AS US GOODS BECOME MORE EXP OVERSEAS; HENSE AD WILL DECREASE. THE SUPPLY FOR FOREIGN GOODS DOMESTICALLY SHOULD INCREASE AS IMPORTS BECOME CHEAPER.
A LARGE INCREASE IN NOMINAL WAGES, PERHAPS ORCHESTRATED BY UNIONS, WOULD MOST LIKELY RESULT IN:
- A DECREASE IN REAL GDP AND AN INCREASE IN THE PRICE LEVEL.
- AN INCREASE IN NOMAL WAGES REPRESENT AN INCREASE IN INPUT COSTS. THIS WOULD SHIFT AD TO THE LEFT RESULTING IN A DECREASE IN REAL GDP AND AN INCREASE IN THE OVERALL PRICE LEVEL.
ECONOMIC FLUCTUATIONS OR BUSINESS CYCLES ARE BEST DESCRIBED AS:
FLUCTUATIONS IN THE LEVEL OF ECONOMIC ACTIVITY, RELATIVE TO A LONG TERM GROTH TREND.
ECONOMIC GROWTH
LONG RUN INCREASES IN A NATIONS STANDARD LIVING.
WHAT WOULD CAUSE REAL GDP TO INCREASE???
A DECLINE IN INTEREST RATES AND A FALL IN INPUT COSTS.
-A DECLINE IN INTEREST RATES WOULD CAUSE THE AD CURVE TO SHIFT TO THE RIGHT WHICH INCREASE REAL GDP. SIMILARLY, A DECLINE IN INPUT COSTS WOULD CAUSE AS TO SHIFT RIGHT WHICH ALSO INCREASES REAL GDP
DECLINE IN GOVERNMENT SPENDING
CAUSES REAL GDP TO DECREASE.
AT THE PEAK OF A BUSINESS CYCLE, WHICH OF THE FOLLOWING CONDITIONS IS MOST TRUE??
-CAPACITY CONSTRAINTS AND LABOR SHORTAGES ARE LIKELY TO PUT UPWARD PRESSURE ON THE OVERALL PRICE LEVEL. .
PEAK
- A PEAK IS A HIGH POINT OF ECONOMIC ACTIVITY. IT MARKS THE END OF AN EXPANSIONARY PHASE AND THE BEG OF A CONTRACTIONALY PHASE IN ECONOMIC ACTIVITY. AT THE PEAK OF A BUSINESS CYCLE, FIRM PROFIT ARE LIKELY TO BE AT THEIR HIGHEST LEVEL.
- FIRMS AREA ALSO LIKELY TO FACE CAPACITY CONSTRAINTS AND INPUT SHORTAGES RAW MATERIAL AND LABOR, LEADING TO HIGHER COSTS AND HIGUER OVERALL PRICE LEVEL.