Macro Unit Two

Question 1

Aggregate demand curve

Answer 1

A curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level

Question 2

Real interest rate effect

Answer 2

A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded
When price falls, C increases, more money to spend, invest, interest rates down, GDP up, I up

Question 3

Wealth effect

Answer 3

A decrease in ten price level makes consumers wealthier, which encourages them to spend more. The increase in consumer spending in means a larger quantity of goods and services demanded
Price down, q up, C up, GDP up

Question 4

Net export effect

Answer 4

When a fall in the US price level causes US interest rates to fall, the real exchange rate depreciates, and this depreciation stimulates US net exports and thereby increases the quantity of goods and services demanded
I up, US money down, net exports up (short run/nominal), GDP up

Question 5

What will shift AD curve

Answer 5

Any event that changes how much people want to consume at a given price level, ex taxes
Any event that changes how much firms want to invest at a given price level
Government purchases (reduce/buy more)
Any event that changes net exports for a given price level, ex exchange rates

Question 6

Recession

Answer 6

Two consecutive quarters of declining real output (real GDP)
Accompanied by:
-declining real incomes
-rising unemployment

Question 7

Depression

Answer 7

A very severe, long recession

Question 8

The business cycle

Answer 8

Growth trend, recoveries and peaks
Recovery is expansion of GDP
Recession is contraction of GDP

Question 9

Y axis

Answer 9

Price level

Measures the value of money (inflation)

Question 10

X axis

Answer 10

Output (real GDP)
Measures the quantity of goods produced
When output falls, unemployment rises

Question 11

Aggregate demand curve

Answer 11

A curve that shows what all sectors want to buy at each price level aka
A curve that shows how GDP varies with price level

Question 12

Aggregate demand

Answer 12

As price level falls, households, businesses, government, and foreigners increase their consumption

Question 13

Aggregate supply curve

Answer 13

A curve that shows the amount of goods and services all sectors are willing to supply at each level of prices

Question 14

Classical economy theory

Answer 14

Prices and wages are flexible
They will always adjust ensuring that everything is always purchased
Demand is not an issue
Assumes that the economy is fully utilizing its resources
Long run

Question 15

Long run aggregate supply curve

Answer 15

In notes, completely vertical

Question 16

Why is aggregate supply curve vertical in long run

Answer 16

An economy’s production (GDP) and growth are dependent on its availability of land, labor, and capital, and it’s ability to use those resources to create goods
It is not dependent on the price level
It is fixed at a level of full employment of resources

Question 17

LRAS

Answer 17

LRAS is fixed on the x acid where the economy is at:
Full employment (5% unemployment)
Max potential output (GDP)

Question 18

Things that shift the LRAS curve

Answer 18

Increase/decrease in resources/factors of production
Change in technology
Anything that would shift a PPF curve

Question 19

Fill out table from notes about differences in LRAS and SRAS

Answer 19

K

Question 20

Keynesian theory (aka the general theory 1936)

Answer 20

Keynesian theory suggests that say’s law does not always hold true
Demand is key (called underconsumption)
People save extra during bad times
Not all resources are always used during a recession
Wages and prices are fixed or sticky in the short run
An increase in price level will result in an increase in the amount of output supplied by an economy and vice versa

Question 21

Short run aggregate supply curve

Answer 21

Upward sloping, in notes

Question 22

Things that will shift the SRAS curve

Answer 22

Anything that shifts the LRAS curve
Expectations about price
An increase in the expected price level shifts the SRAS to the left
A decrease in the expected price level shifts the SRAS to the right

Question 23

An economy at equilibrium

Answer 23

LRAS, SRAS, and aggregate demand all intersect
Also known as at full employment
Y represents
-max GDP
-5% unemployment
-Max income

Question 24

Real GDP

Answer 24

Real GDP can only increase when an economy produces more output (goods and services)
Nominal GDP can increase with an increase in price level

Question 25

Showing a recession using the AD/AS model

Answer 25

Short run AS and AD must intersect below the full employment level of output/natural rate of unemployment
AD intersects AS before it intersects LRAS going from left to right

Question 26

Business cycle step one

Answer 26

AD shifts left

Could be caused by terrorist attack, bubble burst, housing market collapse, dot com collapse, bank failures

Question 27

Business cycle step two

Answer 27

Real prices and real GDP fall
The economy is now not producing at max potential output
AD and SRAS intersect before SRAS and LRAS intersect

Question 28

Business cycle step three

Answer 28

Over time AS shifts to the right

People expect the price level to be lower (which shifts AS right)

Question 29

Business cycle step four

Answer 29

The economy returns to equilibrium in the long run
Output remains at full employment in the long run
The price level has fallen

Question 30

Stagflation

Answer 30

Falling output and rising prices
Stagnant growth and inflation 
Twin evils
No automatic fix
AS has shifted left

Question 31

Inflationary gap

Answer 31

The economy is operating beyond the full employment level of output
Unemployment is below the natural rate
Resources are working overtime
The inflation will eventually cause a leftward shift in SRAS
AS and AD intersect after SRAS and LRAS intersect

Question 32

Economic growth

Answer 32

A long run sustained increase in real GDP

Developed countries aim for 2-3% growth per year

Question 33

Productivity

Answer 33

The quantity of goods and services produced per worker

Determines a nation’s potential

Question 34

Things that can increase a worker’s productivity

Answer 34

Increases in:

• capital goods (capital stock)
• human capital (the skill level of laborers)
• natural resources
• technological knowledge

Question 35

Increase in productivity

Answer 35

Any increase in productivity shifts the LRAS curve to the right
This displays economic growth

Question 36

Catch up effect

Answer 36

Poor countries tend to grow more rapidly than rich countries

Due to the diminishing returns of adding new capital stock