Macro Unit 4

Question 1

Why the AD curve slopes downward? Which reason is the most important?

Answer 1

-The Wealth Effect
-The Interest Rate Effect
-The Exchange Rate Effect
The interest rate effect is the most important

Question 2

Theory of liquidity preference

Answer 2

Theory that the interest rate adjusts to bring money supply and money demand into balance

Question 3

Nominal interest rate vs. real interest rate

Answer 3

Nominal: interest rate as usually reported
Real: interest rate corrected for inflation

Question 4

When you increase price level, what happens to money demand and the interest rate?

Answer 4

Money demand increases and the interest rate that bring the money market into equilibrium increases

Question 5

When interest rates a higher, what happens to investment and the Q of goods and services demanded?

Answer 5

Investment decreases and the quantity of goods and services demanded decreases

Question 6

Equilibrium interest rate

Answer 6

The quantity where money demand exactly balances the quantity of money spooked,

Question 7

What happens to AD when the Fed increases money supply?

Answer 7

By increasing money supply, interest rates are lower and the quantity of goods and services demanded increases, moving AD right

Question 8

What happens to AD when the Fed contracts money supply?

Answer 8

Interest rates rise, reducing the quantity of goods and services demanded, which shifts AD left

Question 9

Federal funds rates

Answer 9

The interest rate banks charge each other fr short term loans

Question 10

Monetary policy can be described in terms of…

Answer 10

The money supply or interest rate

Question 11

Fiscal policy

Answer 11

The government’s choices regarding the overall level of government purchases or taxes

Question 12

The multiplier effect

Answer 12

The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
Ex. If the government gets $20 billion, the AD curve shifts a little larger than 20 billion

Question 13

What happens to the economy with the multiplier effect?

Answer 13

More money from the government raises employment and profits. Workers earn more and firms get bigger profits, and firm owners are able to raise spending on consumer goods, which raises the demand for goods and services

Question 14

What happens to AD when the government increases purchases or cuts taxes?

Answer 14

A decrease in government purchases or and increase in taxes shifts AD left

Question 15

What happens to AD when the government alters spending or taxes?

Answer 15

The shift of AD can either be larger or smaller than the fiscal change

Question 16

What does the multiplier effect do to AD?

Answer 16

It amplifies the effects of fiscal policy on AD

Question 17

What does the crowding out effect do to AD?

Answer 17

It tends to dampen the effects of fiscal policy on AD

Question 18

Disposable income

Answer 18

Income that does not go to necessities (left over money after paying for necessities)

Question 19

Autonomous consumption

Answer 19

Consumption that does not vary with income (occurs even when income is ZERO) ex. Utilities

Question 20

Average propensity to consume

Answer 20

The % of income that a consumer spends on average

Consumption (in $)/Income (in $)

Question 21

Marginal propensity to consume

Answer 21

The likelihood of you spending then next dollar you earn

Change in consumption (in $)/Change in income (in $)

Question 22

Average propensity to save

Answer 22

100%-% average propensity to save

Question 23

Marginal propensity to save

Answer 23

1-MPC

Question 24

Crowding out effect

Answer 24

The reduction in aggregate demand that results when fiscal expansion raises the interest rate
When the government makes a purchase, there is an increase in demand which raises incomes of workers and owners of firms. As income rises, households plan to buy more goods and services and hold most of their wealth in liquid form. The increase in income raises demand for money.