macro exam 3

Question 1

Aggregate Expenditures

Answer 1

GDP=AE=C+I+G+(X-M)

Components measured by spending

Question 2

MPC

Answer 2

Marginal propensity to consume: fraction of additional income that is spent

change in consumption/income

Question 3

MPS

Answer 3

The change in saving/income

Question 4

Determinants of Consumption

Answer 4

• wealth
• expectations about future prices
• household debt
• taxes

Question 5

Investment and Income

Answer 5

have no relationship (autonomous)

Question 6

Determinants of Investment

Answer 6

-expectations about future revenues and return on investment
-technology
-operating costs
-capital goods on hand

Question 7

Net Exports

Answer 7

Depend on income in other countries and exchange rate

Question 8

Multiplier Effect

Answer 8

when an initial amount of spending causes income to grow by a larger amount

Question 9

Aggregate Demand Curve

Answer 9

shows output of goods and services demanded at different price levels

Question 10

Determinants of Aggregate Demand

Answer 10

• consumption
• investment
• gov spending
• net exports

Question 11

4 major factors of consumer spending (besides income) :

Answer 11

• wealth
• consumer expectations
• debt
• taxes

Question 12

Long-run Aggregate Supply

Answer 12

-supply curve is vertical
- all variables are adjusted in the long run
- gravitates towards full employment

Question 13

Determinants of Long-run Aggregate Supply

Answer 13

-available resources
-quality of labor force
-available technology

Question 14

Shifts of the LRAS curve

Answer 14

• increase in the resources of production
• labor quality is enhanced
• technological improvements

Question 15

Determinants of Short-run Aggregate Supply

Answer 15

-input prices
- productivity
-taxes and regulations
-market power of firms
-business expectations
-inflationary expectations

Question 16

Short Run Equilibrium

Answer 16

where aggregate demand and short run aggregate supply curves intersect

Question 17

Long Run Equilibrium

Answer 17

where aggregate demand and long run aggregate supply curves intersect

Question 18

Demand-side Fiscal Policy

Answer 18

involves using gov spending, taxes, and transfer payments to change aggregate demand and equilibrium output and price level in the economy

Question 19

Automatic Stabilizers

Answer 19

Tax revenues and transfer payments automatically adjust to economic fluctuations without action by congress

Question 20

Discretionary Fiscal Policy

Answer 20

the deliberate manipulation of gov purchases, taxation and transfer payments, by congress

Question 21

Tools of Discretionary Fiscal Policy

Answer 21

-gov purchases
-taxes
-transfer payments

Question 22

Simple Spending Multiplier

Answer 22

1/1-MPC (consumption varies, other components constant)

Question 23

Simple Tax Multiplier

Answer 23

-MPC/1-MPC

Question 24

Expansionary Fiscal Policy

Answer 24

gov spending^
taxes
transfer payments^

used to close contractionary gap (below full employment)

Question 25

Contractionary Fiscal Policy

Answer 25

gov spending
taxes^
transfer payments

used to close expansionary gap (above full employment)

Question 26

Supply Side Policies

Answer 26

1. spending on infrastructure, education, and technology
2. reducing tax rates
3. expanding investment and reducing regulations

Question 27

Timing Lags

Answer 27

-info lag: data not available
-recognition lag: time to recognize data
-decision lag: debated and signed with congress and president
-implementation lag: takes time to implement new programs