Macro Unit Four

Question 1

Expansionary monetary policy

Answer 1

the fed can increase the money supply to:
-decrease nominal interest rates, which will boost AD:
+increasing output (real GDP)
+decreasing unemployment
+decreasing deflation
consumption and investment are sensitive to interest rates

Question 2

steps of expansionary monetary policy

Answer 2

1. the fed increases the money supply
2. AD increases because C and I increase
3. Ad shifts right

Question 3

contractionary money policy

Answer 3

the fed will decrease the money supply to:
-increase nominal rates, which will lower AD:
+decrease inflation (disinflation)
+decrease output (real GDP)
+increase unemployment

Question 4

disinflation

Answer 4

a decrease in the rate of inflation

Question 5

steps of contractionary money policy

Answer 5

1. the fed decreases the money supply
2. AD down because C and I down
3. Ad shifts left

Question 6

problem with tax cuts

Answer 6

the multiplier with government spending is larger than the multiplier with tax cuts
people save some of the money they receive from tax cuts
-using money to pay off debt is like saving

Question 7

crowding out effect

Answer 7

occurs when government spending “crowds out” private sector spending
the government is demanding funds, increasing interest rates
reduces the spending multiplier

Question 8

crowding out effect

Answer 8

1. an increase in government spending
2. an increase in AD
3. an increase in price level
4. an increase in money demand
5. an increase in interest rates
6. a decrease in investment
7. a decrease in AD (AD doesn’t multiply as much as it should in 1)

Question 9

crowding out

Answer 9

1. AD up bc G up
2. AD increases
3. demand for money increases
4. AD down bc I down
5. AD decreases

Question 10

supply side economics

Answer 10

fiscal policy aimed at increasing aggregate supply
-can affect both short-run and long-run aggregate supply
-ex. build roads: increases infrastructure
-ex. cut income taxes: increases worker productivity
-ex. reduction in business taxes or investment tax credits
+these are like subsidies for investors

Question 11

liquidity trap

Answer 11

though interest rates are relatively low:
-people won’t borrow
-banks won’t lend
the money multiplier/velocity of money slows and the economy stays in a recession

Question 12

average propensity to consume

Answer 12

the percentage of income that a consumer spends on average

consumption (in $) / income (in $) x 100

Question 13

average propensity to save

Answer 13

100% - % average propensity to consume

Question 14

marginal propensity to consume (MPC)

Answer 14

the likelihood of you spending the next dollar you earn
change in consumption (in $) / change in income (in $) x 100
should be between 0 and 1 or 0 and 100%

Question 15

marginal propensity to save

Answer 15

1 - MPC

Question 16

spending multiplier

Answer 16

a way to calculate how a change in spending will produce a larger change in income/GDP
mostly discussed with government spending, but affects all parts of GDP (C, I, G, NX)

Question 17

spending multiplier (aka Keynesian spending multiplier)

Answer 17

1 / (1 - MPC) or 1 / marginal propensity to save

impact of government spending or tax cuts = spending multiplier x government spending (or tax cut)

Question 18

fiscal policy (aka Keynesian economics/theory)

Answer 18

the change in tax rates or government spending by policymakers to influence an economy
-enacted by congress in the united states
mainly used to boost aggregate demand during recessions

Question 19

effect of expansionary fiscal policy on AD

Answer 19

AD increases

Question 20

fiscal policy—government spending

Answer 20

government spending is autonomous
an increase in government spending boosts GDP/aggregate demand through the spending multiplier
AD = Y + C + I + G + X

Question 21

fiscal policy—tax cuts

Answer 21

the US federal government controls the rate at which businesses and households are taxed
a decrease in taxes increases consumption and investment, boosting GDP/aggregate demand
-corporate/business taxes = I
-income taxes = C

Question 22

government’s balance sheet

Answer 22

debits = transfer payments and government purchases = total spending
credits = revenues from taxes = total revenue
budget deficit: spending > revenue
budget surplus: spending < revenue

Question 23

debits

Answer 23

money going out

Question 24

credits

Answer 24

money coming in

Question 25

third fiscal policy—transfer payments

Answer 25

the transferring of money to citizens by the government

• affect AD through consumption
• ex. food stamps, stimulus checks
• do not count as government spending, do count toward deficit vs spending