Midterm 1

Question 1

Consumption

Answer 1

C = C0 + C1(Yd)

Question 2

disposable income

Answer 2

Yd = Y - T

Question 3

Demand for Goods

Answer 3

Y = C + I + G

Question 4

keynesian multiplier

Answer 4

1/1-C1

Question 5

Ms supply curve

Answer 5

is vertical because the fed controls the supply of money (indirectly and in two ways)
is constant

Question 6

how does the Fed control the Money Supply

Answer 6

by buying and selling securities

Question 7

Md curve

Answer 7

Downward slope

Md = y(a-bi)

Question 8

buy securities

Answer 8

increase in money supply

decrease in interest rate

Question 9

sell securities

Answer 9

decrease in money supply

increase in interest rate

Question 10

expansionary monetary policy

Answer 10

buying securities 
increase in money supply
decrease in interest rate
increases level of income
-moves LM curve down

Question 11

contractionary monetary policy

Answer 11

sell securities
decrease in money supply
increase in interest rate
decreases level of income
-moves LM curve up 
-inflation and GDP increases

Question 12

LM curve

Answer 12

is horizontal because the Fed chooses the interest rate

-moves with monetary policies

Question 13

Investment (I)

Answer 13

I = b0 + b1Y - b2i

Question 14

If taxes increase then income

Answer 14

decreases and therefor consumption also decreases

Question 15

If you increase govnt expenditures and taxes by the same amount

Answer 15

they will cancel each other out

Question 16

Expansionary fiscal policy

Answer 16

increasing govnt. expenditures
decreasing taxes
-moves IS curve to the right
-income increases but interest rate stays the same
-inflation and GDP increases

Question 17

contractionary fiscal policy

Answer 17

decreasing govnt. expenditures
increasing taxes
-moves IS curve to the left

Question 18

IS curve

Answer 18

• downward slope

- moves with fiscal policy

Question 19

GDP Growth rate %

Answer 19

for 2019 = (2019 - 2018)/2018
or
= (new - old)/old

Question 20

GDP Levels

Answer 20

for 2019 = (2018 * growth rate %) + 2018
or
= (old * growth rate %) + old

Question 21

Spending multiplier

Answer 21

= 1/(1-MPC)

mpc = marginal propensity

Question 22

unemployment goes up

Answer 22

• harder for worker to find job
• easier for firms to replace you or find workers
• bargaining power of workers decreases
• real and nominal wages decrease

Question 23

fiscal deficit

Answer 23

-aka public deficit

= G - T

Question 24

Wage setting

Answer 24

1/(1+m)

Question 25

if markup increase

Answer 25

PS curve decreases

Question 26

if markup deceases

Answer 26

PS curves increases

Question 27

structural unemployment rate

Answer 27

where PS and WS curve intersect

Question 28

P =

Answer 28

(1 + m)w

Question 29

interest rate =

Answer 29

i0 + beta(inflation)

Question 30

AD curve

Answer 30

-shifts fiscal and monetary policy

Question 31

output is below potential output

Answer 31

economy is cold

Question 32

output is above potential output

Answer 32

economy is overheating

Question 33

natural unemployment

Answer 33

inflation_t = inflation_et = 0

Question 34

if theta = 0 than

Answer 34

-expected inflation = past inflation
which means dont trust fed
-inflation target is not a factor

Question 35

As AS curve shifts

Answer 35

down = less inflation
up = more inflation

Question 36

in the Long-Run

Answer 36

Y = Yn (GDP = Potential GDP)
inflation = inflation_e

Question 37

reduction in market competition

Answer 37

increase in markup and PS curve shifts down

-decrease in real wage (W/P)