Cumulative Exam Flashcards
Variables that SHIFT the Demand Curve
- Tastes/Preferences of Consumers
- Price of Related Goods
- Income of Consumers
- Number of Buyers
- Expectations for Future
Example: A tax that increases the price of a good.
What causes a change along the demand curve?
A change in the price of a good leads to movement along the demand curve (for that good).
Variables that SHIFT the Supply Curve
- Technology
- Input Prices
- Expectations for Future
- Price of Related Goods
- Number of Sellers
Effect of Surplus
Surplus = Excess Supply
The downward pressure on the price of a good/service increases the quantity demanded and decreases the quantity supplied for that good/service.
Production Possibilities Frontier (PPF)
A graphical representation of the various combinations of output a country/economy can produce.
Absolute Advantage
The ability to produce a good/service with fewer inputs than another producer.
Comparative Advantage
The ability to produce a good/service at a lower opportunity cost than another producer.
What is the PPF limited by?
- Knowledge/Technology
- Available Resources
What are the criteria for a straight PPF graph?
- Constant Opportunity Costs
- Homogenous Resources
What are the criteria for a curved PPF graph
- Variable Opportunity Costs
- Heterogenous Resources
Heterogenous Resources: Different resources are best suited for different tasks.
How does an increase in available resources impact the PPF?
The PPF shifts outward.
(The economy can produce more of both goods.)
The slope of the PPF is unchanged, so the resulting PPF is parallel to the original PPF.
How does a decrease in available resources impact the PPF?
The PPF shifts inward.
(The economy will produce less of both goods.)
The slope of the PPF is unchanged, so the resulting PPF is parallel to the original PPF.
How does an improvement in technology impact the PPF?
The PPF shifts outward and the slope increases.
(The economy can produce more of that good and produces that good more efficiently).
The slope of the PPF increases with respect to the affected good.
How does a loss of technology impact the PPF?
The PPF shifts inward and the slope decreases.
(The economy will produce less of that good and produces that good less efficiently).
The slope of the PPF decreases with respect to the affected good.
r
Real Interest Rate
Real Interest Rate: The interest rate after adjusting for inflation.
i
Nominal Interest Rate
Nominal Interest Rate: The interest rate before adjusting for inflation.
Capital
K
Labor
L
Total Income
Y
Inflation Rate
π
P
- Price
- Price Level
Profit
π
Real GDP
Y
Price Level
A measure of the current level of prices in an economy.
Real Variables
Variables that neutralize/negate the effects of inflation.
CP Index vs. GDP Deflator
- The CPI is based on what consumers purchased.
- The GDP deflator is based on what the economy produces.
What does the growth in the GDP Deflator value indicate?
Inflation Rate
Demand Shocks
- Changes in Spending
- Changes in Money Supply
- Changes in Taxation Levels
- One-Time Changes in Price
m
Marginal Propensity to Consume (MPC)
MPC: The percentage of each new dollar of income that is spent in the economy.
Tax Rate
(Tax Burden)
T
How does increasing the price level impact the real money supply?
The real money supply decreases.
As prices in the economy increase, the purchasing power of money decreases, which results in a decrease in the real money supply.
How does an increase in price level affect the LM curve?
The LM curve shifts to the left.
An increase in price level causes the purchasing power of money to decrease, which decreases the real money supply and (as a result) increases the real interest rate.
How does a decrease in price level affect the LM curve?
The LM curve shifts to the right.
A decrease in price level causes the purchasing power of money to increase, which increases the supply of real money in the economy and decreases the real interest rate.
How does an increase in real interest rate affect the LM curve?
The LM curve shifts to the left.
An increase in real interest rates causes people to convert investments to interest-bearing assests, which decreases the available money supply in the economy and decreases the demand for liquid money.
How does a decrease in real interest rate affect the LM curve?
The LM curve shifts to the right.
A decrease in real interest rates causes people to convert interest-bearing assets to investments, which increases the available money supply in the economy and increases the demand for liquid money.
How does an increase in GDP affect the LM graph?
The LM curve shifts to the right.
An increase in GDP causes people to make more purchases, which increases the demand for real money and increases the amount of real money in the economy.
Why is the LM curve upward-sloping?
- As the GDP of the economy increases, the income of households increases, which results in an increased demand for liquid cash for purchases.
- As the GDP of the economy increases, the available money supply in the economy increases since consumers are making more purchases.
- The real interest rate must increase to balance the increase in real money demand that results from an increase in the economy’s GDP.
How does a decrease in money supply impact the real interest rate?
The real interest rate increases.
The real interest rate is the cost of borrowing money; when there is less money in the economy, the money becomes scarce, which increases the cost of borrowing that money.
How does a rise in prices impact the IS-LM graph?
The LM curve shifts left, as the quantity of real money in the economy decreases due to lower purchasing power.
How does a decrease in exports impact the IS-LM graph?
The IS curve shifts to the left.
The decrease in exports causes the spending in the economy to decrease, which results in a decrease in money demand and a decrease in real interest rate.
Why does the aggregate demand curve shift downward?
- As the price level increases, the real money supply decreases, real interest rate increases, the level of consumption decreases, and the total GDP decreases.
- As the price level decreases, the real money supply increases, the real interest rate decreases, the level of consumption increases, and the total GDP increases.
Open Market Operations
The Federal Reserves buys/sells government bonds to private commerical banks (in an effort to increase/decrease the money supply).
- The Federal Reserve decreases the money supply by selling bonds to private banks.
- The Federal Reserve increases the money supply by buying bonds from private banks.
Why does the money supply decrease when the Federal Reserve sells bonds?
When the FR sells a government bond to a private banks, it is removing money from the bank in return for the bond.
By extracting money from private banks, the FR is taking money out of the economy and decreasing the money supply.
Why does the money supply increase when the Federal Reserve buys bonds?
When the FR buys a government bond from a private bank, it is giving money to the bank in return for the bond.
By adding to the money supply of the bank, the FR is increasing the quantity/supply of money in the total economy.
Normal Good
A good that individuals buy/demand more of as their income increases.
The demand of a normal good is directly correlated to the income of the buyer.
Inferior Good
A good that individuals buy/demand less of as their income increases.
The demand of an inferior good is inversely proportional to the income of the buyer.
