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Business Administration 101 > Econ 202 Finale > Flashcards

Econ 202 Finale Flashcards

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1
Q

what does the AD/AS model allow economists to study?

A

fluctuations in inflation, unemployment, and real GDP over the business cycle

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2
Q

what is quantity of real GDP demanded?

A

the total amount of final goods and services produced inside the US that people, businesses, the government, and foreigners plan to buy

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3
Q

What is the formula for Quantity of Real GDP demanded?

A

real personal consumption expenditure + planned real gross private domestic investment + real government expenditure on goods and services + real net exports of goods and services

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4
Q

when do real GDP and quantity of real GDP demanded differ?

A

if planned real Gross priv dom investment differs from actual real gross priv dom investment

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5
Q

Why would planned Real Gross Private Domestic Investment be different from
actual Real Gross Private Domestic Investment?

A

depends on levels of inventories

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6
Q

what happens to planned investment if less goods are sold than expected?

A

inventories increase above planned levels

planned investment < actual investment

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7
Q

what happens to planned investment if more goods are sold than expected?

A

inventories decrease below planned levels

planned investment > actual investment

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8
Q

what is consumption influenced by? what makes it lower?

A
  • higher real interest rates
  • lower current after tax disposable income
  • lower expected future income
  • lower real wealth
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9
Q

what is after tax disposable income?

A

income - taxes + transfer payments

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10
Q

what lowers disposable income?

A

higher taxes and lower transfer payments

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11
Q

what factors lower planned
investment?

A
  • higher real interest rates
  • lower expected future profit from current capital goods projects
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12
Q

what is the aggregate demand curve?

A

the relationship between the aggregate price level and the quantity of real GDP demanded

aka AD curve

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13
Q

why does the aggregate demand curve slope downward?

A

increases in the price level lead to a reduction in the quantity of real GDP demanded

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14
Q

what are categories of reason for why the AD curve slopes downwards?

A

wealth effects and substitutions effects

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15
Q

what is a wealth effect?

A

an increase in the price level from P0-> P1

  • leads to a decrease in real wealth
  • leads to an increase in saving and reduction in consumption, and thus the quantity of real GDP demanded
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16
Q

what is substitution effect #1?

A

increase in P0->P1
- leads to a decrease in amount of real money
- which leads to a decrease in the price of bonds, and an increase in the nominal interest rate

  • real interest rate increases
  • which leads to lower consumption and lower planned investment
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17
Q

what is substitution effect #2?

A

increase in price level from P0-> P1

-prices in other countries remain same, US goods more expensive
- reduces US exports and increases imports, reduces quantity of real GDP demanded

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18
Q

what 4 factors shift the AD curve?

A

1) fiscal policy
2) monetary policy
3) expectations about the future
4) the world economy

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19
Q

what is fiscal policy (in this context)?

A

the govs attempt to influence the ec by setting and changing taxes, making transfer payments, and purchasing g/s

  • changes in taxes and transfer payments influence after tax disposable income, which affects consumption
  • changes in gov spending directly influences the quantity of real GDP demanded
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20
Q

what is monetary policy in this context?

A

changes in the quantity of the nominal money supply in the economy by the Fed which can influence the real interest rate in the short run

  • changes in real interest rate affect consumption and planned investment
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21
Q

what does expectations about the future mean in this context?

A
  • expectations about future income affect consumption
  • expectations about future profit influence business decisions regarding planned investment
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22
Q

what does the world economy mean in this context?

A

changes in foreign income influence demand for US exports

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22
Q

what happens to the AD curve when the quantity of real GDP demanded increases?

A

the AD curve will shift to the right

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22
Q

what happens to the AD curve when the quantity of real GDP demanded decreases?

A

AD curve shifts left

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23
Q

what is the quantity of real GDP supplied?

A

the total quantity of final g/s that firms plan to produce

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24
Q

does the quantity of real GDP supplied ever differ from real GDP?

A

no

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25
Q

what will the real wage rate do in the long run?

A

adjust to put the labor market in equilibrium

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26
Q

what is the macro long run?

A

a period of time long enough for the labor market to adjust to equilibrium and for real GDP to equal potential

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27
Q

what is the macro short run?

A

a period of time shorter than the long run for which real GDP can differ from potential

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28
Q

what is the LAS curve?

A

the relationship between price level and the quantity of real GDP supplied in the long run

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29
Q

why is the las curve vertical?

A

a higher level of prices in ec doesn’t cause higher levels of production in the long run

the nominal wage rate adjusts upward with the price level to make the real wage rate = equilibrium real wage rate

nominal wage rate and price level rise proportionally to one another

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30
Q

what happens to prices in the short run?

A

prices of g/s are relatively flexible, meaning they adjust relatively quickly to changing conditions

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31
Q

what happens to wages in the short run?

A

nominal wages are relatively sticky, meaning they adjust relatively slowly (labor contracts)

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32
Q

what is the SAS curve?

A

the relationship between the quantity of real GDP supplied and the price level

33
Q

why does the SAS curve slope upward?

A
  • as prices rise in the short run, the real wage rate is decreasing, making it profitable for firms to increase production
  • leads to an increase in real GDP when price level rises (and vice versa)
34
Q

under which circumstances does sas and las curves change?

A

if potential real GDP and/or the nominal wage rate change

35
Q

what happens to the supply curves if potential real GDP increases?

A

both curves shift right

36
Q

what happens to the supply curves if potential real GDP decreases?

A

both shift left

37
Q

what happens to the SAS curve if the nominal wage rate decreases?

A

shifts right

38
Q

what happens to the SAS curve if the nominal wage rate increases?

A

shifts left

39
Q

when does the macroeconomic equilibrium occur in the AS/AD model?

A

when the quantity of real GDP demanded = quantity of real GDp supplied

40
Q

what is the short run mac. ec. equi.?

A

at the intersection of the SAS and AD curves

41
Q

what is the long run mac.ec. equi?

A

when the SAS, LAS, and AD curves all intersect at the same point

42
Q

what happens to real GDP and price level in the long run?

A
  • the level of real GDP is determined by potential GDP

thus aggregate demand has no effect on real GDP in the long run

  • the price level is determined by the position of the aggregate demand curve and potential real GDP
43
Q

can the short run equi occur at a level of real GDP that does not equal potential?

A

yes

44
Q

why would the short run equi allow for real GDP to not equal potential? what does it create?

A

either AD or SAS fluctuates, and the money wage rate does not adjust quickly enough to keep real GDP at potential

creates the business cycle!!

45
Q

what is below full employment equilibrium?

A

a short run equi in which real GDP is below potential

46
Q

what is above full employment equi?

A

a short run equi where real GDP is above potential real GDP

47
Q

what causes the ec to move away from potential GDP?

A

fluctuations in the AD

48
Q

what does a reduction in aggregate demand cause?

A

a recession

49
Q

how does supply affect business cycles?

A

when some event temporarily changes the cost of production for firms

ex. large increases in the price of oil were a major contributor to the high inflation during the 70’s

50
Q

what is stagflation?

A

the simultaneous occurrence of increased inflation and below full employment equilibrium

51
Q

how is stagflation caused?

A

a reduction in the SAS

52
Q

what are the two ways inflation can exist in the AS/AD model?

A

demand pull inflation AND cost push inflation

53
Q

what is demand pull inflation?

A

1) AD curve shifts to the right
2) in the short run, firms respond to the increase in demand by increasing prices
3) in the long run, money wage rates rise, which shifts the SAS curve left
4) firms respond to the increase in their costs by increasing prices further

54
Q

what is cost push inflation?

A

1) an increase in the cost of production shifts the SAS curve to the left
2) stagflation
3) government policymakers take actions to push real GDP back toward potential by increasing AD
4) the rightward shift of the AD curve leads to more inflation

55
Q

what is the primary way to have sustained inflation in the model?

A

AD persistently increase at a rate quicker than the rate of growth of potential real GDP

over time LAS curve shifts to the right as potential real GDP grows

if the AD curve shifts to the right by more than the rightward shifts of the LAS curve, this will create sustained inflation

56
Q

which is the only source of demand increases that can persistently increase demand year after year?

A

monetary policy

57
Q

What is the federal budget?

A

an annual statement of the outlays and receipts of the US government, together with the laws and regulations that approve and support them

58
Q

what are receipts (in this context)?

A

how much revenue the gov collected

59
Q

what is tax policy (in this context)?

A

decisions the gov made about revenue, laws about taxes

60
Q

what are outlays?

A

how much the government spent

61
Q

what are the components of the Federal budget?

A

1) receipts
2) tax policy
3) outlays
4) decisions the gov made about how much they would spend

62
Q

what act requires congress to use fiscal policy to “promote maximum employment, production and purchasing
power”?

A

Employment Act of 1946

63
Q

what is the US federal budget process?

A
  1. the president proposes a federal budget to Congress by early Feb (for the next fiscal year)
  2. congress debates this proposal and passes their own proposed budget before the beginning of the fiscal year
  3. the president can either sign Congress’s proposed budget into law or veto it
  4. once the fiscal year begins additional supplemental budget laws can be passed into law
  5. as the fiscal year unfolds, the evolving state of the ec. can lead to differences between the budget Congress pass and actual outcomes
64
Q

what are the components of receipts?

A

1) personal income taxes
2) social security, medicare, and unemployment insurance
3) corporate income taxes
4) indirect taxes

65
Q

what are the components of outlays?

A

1) transfer payments
2) expenditure on g/s
3) debt interest

66
Q

what are the components of transfer payments?

A

1) social security benefits
2) medicare
3) medicaid
4) other

67
Q

what is the largest component of the federal budget?

A

transfer payments (61%)

68
Q

how much does national defense account for in gov expenditure?

A

47%

69
Q

how much is defense accounted for in all Fed spending?

A

13%

70
Q

what is a budget deficit?

A

when receipts are less than outlays

71
Q

what is the current budget deficit?

A

1.695 trillion

6.2% of GDP

72
Q

what is government debt?

A

total amount of debt owed by the federal government

the sum of all past budget deficits - sum of all past surpluses

73
Q

what is the current gov debt?

A

34 trillion or 122% of GDP

74
Q

what is a fiscal stimulus?

A

in a recession, the government uses fiscal policy to shift the AD curve and push real GDP back toward potential real GDP

75
Q

what is automatic fiscal policy?

A

fiscal stimulus that require no action by the government, occur automatically in a recession

for ex:
- lower tax rate, gov automatically collects less in taxes
- more transfer payments, more unemployment
- gov collects less revenue

76
Q

what is discretionary fiscal policy?

A

fiscal stimulus that requires an act of Congress

for ex:
- 2008/2009 the American Recovery and Reinvestment Act helped cut taxes and increase spending
- 2020/2021 Cares Act and ARPA Act, two largest stimulus packages ever passed

77
Q

what is one reason using fiscal stimulus is difficult?

A

uncertainty about the size of the effects of fiscal stimulus on AD, hard to see how much to do

78
Q

what is another reason implementing fiscal stimulus is difficult (longer)?

A

various factors that delay its effects:
- recognition lags
- law making lags
- impact lags

79
Q

what are recognition lags?

A

we dont observe exactly what is going on in the economy in real time

80
Q

what are law making lags?

A

even after we know a recession has started it takes time for Congress to debate and pass discretionary fiscal policy legislation

81
Q

what are impact lags?

A

even after fiscal stimulus is implemented, it can take time before its effects on the economy are felt

Business Administration 101 (4 decks)

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