Macro AP Unit 3 Flashcards
Explain why the aggregate demand curve is downward sloping.
Higher prices cause spending to decrease. This is demonstrated by the real wealth effect, the interest rate effect, and the exchange rate effect.
Explain why the aggregate supply curve is upward sloping.
In the short-run, businesses have an incentive to produce more output when prices increase. When there is inflation, businesses can earn more profit in the short-run before the price of labor and resources increase.
Explain why the long-run aggregate supply curve is vertical.
In the long-run, businesses have no incentive to produce more output when prices increase because resource prices and wages increase proportionately to inflation.
Explain how to show a negative supply shock using the aggregate demand and supply model.
A negative supply shock results in a leftward shift in the SRAS causing the price level to increase and the real GDP to decrease.
Explain what happens in the long-run when there is a negative output gap and no policy action.
Eventually, resource prices and wages will fall since there is high unemployment. The SRAS will shift rightward returning the economy to full employment real GDP.This is assuming that wages are flexible.
Explain what happens in the long-run when there is a positive output gap and no policy action.
Eventually, resource prices and wages will increase since there is high inflation. The SRAS will shift leftward returning the economy to full employment.
Explain how government spending will affect the overall economy in the short-run.
Government spending increases real GDP and decreases unemployment. The actual increase in real GDP is significantly more than the initial increase in government spending due to the multiplier effect.
Explain how a tax cut will affect the overall economyin the short-run.
A tax cut increases real GDP and decreases unemployment. It also decreases government tax revenue and moves the government toward a budget deficit.
Explain why an increase in the MPS causes the spending multiplier to decrease.
When the MPS increase, people save more. This decreases the MPC and the amount people spend.
Explain why a tax cut by a certain amount has less of an impact on the economy than an increase in government spending by the same amount.
A tax cut has less of an impact on the economy because people save a portion of a tax cut so not all the cut is added to the economy. The entire amount of government spending is added to the economy so it has a greater impact.
Explain why progressive income taxes are an example of an automatic stabilizer.
Progressive taxes work counter cyclically, slowing down or speeding up the economy automatically. When there is a recessionary gap, income taxes automatically fall as people fall into lower tax brackets.
