Econ 203 EXAM 3 Flashcards
π ECONOMICS EXAM STUDY GUIDE
- Real GDP vs. Savings and Consumption (Graphs)
Understand: How changes in consumption and savings affect Real GDP.
Key concept: A change in taxes affects disposable income β shifts consumption/savings β affects GDP.
- Shifts in Consumption Schedule
Upward Shift Causes: Increase in wealth
expectations of higher future income
Know: What does not cause an upward shift (MC question).
- APC & APS (Average Propensity to Consume/Save)
Upward shift in savings:
APC decreases
because less of income is spent.
APS increases
because more is saved.
πΌ Investment and Business Behavior
- Investment-Demand Curve
Optimistic businesses: Shift investment-demand curve to the right.
Technological progress: Also shifts investment-demand curve to the right.
- Business Taxes + Real Interest Rate
Lower business taxes: Encourage investment β shift demand curve right.
Higher interest rates: Discourage investment β shift demand curve left.
- Variability of Business Profits (Definition)
Refers to fluctuations in the profits businesses earn over timeβaffects willingness to invest.
π¦ Interest Rates & Consumer Behavior
- Lower Real Interest Rate:
Induces consumers to borrow and spend more β increases consumption.
π Tables: MPC and Income Analysis
- Marginal Propensity to Consume (MPC)
Formula: ΞConsumption / ΞIncome
Youβll be given a table β Calculate the change between two income levels.
- Identifying Activity at Income Level
Use table to tell if:
Thereβs saving or dissaving
Equilibrium level of income is reached
π Aggregate Supply & Demand
- Consumption Schedule (Definition)
A schedule showing how much households plan to consume at different income levels.
- Aggregate Supply (AS) and Demand (AD) Curves
AS Curve (Short-Run): Upward-sloping (prices flexible
input prices fixed)
AS Curve (Long-Run): Vertical (full employment output)
AD Curve: Downward-sloping (real balances
interest rate
- Real-Balances Effect
Higher price level β lower real value of money β less consumption β lower AD.
- Foreign Purchases Effect
Higher domestic prices β foreigners buy less of our goods β lower net exports β AD shifts left.
- Short-Run AS Curve Assumptions
Input prices fixed
output prices flexible β curve is horizontal (immediate short-run).
- Price Level Increases - Know the Effects
Be able to pick out the option that does not happen (common MC format).
π° Fiscal Policy & Government Intervention
- Contractionary vs. Expansionary Fiscal Policy
Expansionary: β gov. spending or β taxes β to fight recession
Contractionary: β gov. spending or β taxes β to reduce inflation
- Demand-Pull Inflation
Too much demand β pulls prices up.
- Multiplier Formula Question
Formula: Multiplier = 1 / (1 - MPC)
Example: MPC = 0.5 β Multiplier = 2
GDP gap = -$100B β Gov. should spend $50B to close it (because 2 Γ $50B = $100B)
- Discretionary Fiscal Policy
Initiated by Congress
βDiscretionaryβ = actively chosen policies (not automatic stabilizers)
- Budget Surplus (Definition)
When government revenue > government spending
- Fiscal Policy (Definition)
Use of government spending and taxation to influence the economy.
π Graph Scenarios: Spending & Output
- AD-AS Graphing Questions
Effects of:
Tax increases
Government spending cuts
How they shift AD left β lowers GDP and price level.
- Business + Government Spending Changes
Both increasing spending: AD shifts right.
Both decreasing spending: AD shifts left.
