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AP Macroeconomics > Unit 03: National Income and Price Determination > Flashcards

Unit 03: National Income and Price Determination Flashcards

1
Q

03.01 Classical Economics and Say’s Law

What is the Classical Theory?

A

Views full employment as the norm of a capitalist economy

  • best way achieve price stability, full empoyment, and steady economy = government stay out of economy
  • Hands-off approach: Laissez-faire
  • Focus long-run: wages, prices, interest rates fully flexable → short run aggregated supply curve more verticle
  • prices act rationing system for goods and services

Result:

  1. Price rise: fewer people willing and able purchase
  2. Price fall: more people purchase
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2
Q

03.01 Classical Economics and Say’s Law

What contributed the creation of classical economics?

A
  1. Adam Smith’s The Wealth of Nations
  • at a time economy at time when factories were in use and labor fully employed
  • society = Potential GDP
  • economy should be self-regulated
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3
Q

03.01 Classical Economics and Say’s Law

What determines growth in the economy from a classical viewpoint?

A

Amout of resources and improvements in technology

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4
Q

03.01 Classical Economics and Say’s Law

How does the classical theory say money supply influence the economy?

A
  • Increase money supply directly affect total spending in economy
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5
Q

03.01 Classical Economics and Say’s Law

What is Say’s Law?

A

Who: Jean-Baptiste Say

  • supported Smith’s work /own theory
  • The Supply would be traded (demand) for other goods and services. Say and other Classical economics believe that producers only produce goods people willing to buy.*
  • “Supply creates its own demand” = Say’s Law*
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6
Q
A

Fully flexible wages, prices, and interest rates result in an economy that quickly stabilizes.

A proposal that “supply creates its own demand” is called Say’s Law.

Because the economy is self-correcting, there is no need for government involvement.

According to Classical economists, the aggregate supply curve is more vertical

Classical economists believe the economy is inherently stable

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7
Q

03.02 Aggregate Supply

Define short-run aggregated supply.

A
  • Total amount of goods and services that firms are willing and able to produce within economy.*
  • short-run, long-run, and immediate short-run
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8
Q

03.02 Aggregate Supply

What is the immediate short-run? how does it relate to supply?

A
  • few days to few months
  • input and output fixed

Short-run supply curve: horizontal line at fixed price

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9
Q

03.02 Aggregate Supply

What is the short-run? how does it relate to supply?

A
  • input fixed and output varies
  • Prices go up → produce more of producct
    • resource prices (especially wages) may not adjust
  • SRAS: up-sloping shape
  1. producers need time adjust changing resource costs
  2. unemployment recources at lower level = SRAS relatively flat
  3. Rising levels = produce more until full capacity
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10
Q

03.02 Aggregate Supply

What is the long-run? how does it relate to supply?

A
  • input and output is variable
  • price lvel not affect supply
  • Supply determined:
    1. level of productivity
    2. supply of resources (especially capital and labor)
  • Market-forces: self-adjusted to changes

Curve: verticle & economy using all productive resources

  1. label YF (Y → acronym national income)
  2. Supply refers to potential output
  3. Intersection of aggregated demand and SRAS = real or actual output
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11
Q

03.02 Aggregate Supply

What are the three ranges of the short run aggreagate supply curve?

A
  1. Keynesian (Horizontal) Range:
    • recession or depression
    • produce more at nearly same price - many unemployed resources
    • Keynesian: never at full employment of resources and price level is stable
      • reason unemployment result lack of demand
      • government step in and create demand
  2. Intermediate Range:
    • approaching full-employment resources
    • healthy economy
  3. Classical (Verticle) Range:
    • full employment resources
    • increase demand results higher prices and little or no more production
    • Classical
      • economy self-correcting
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12
Q

03.02 Aggregate Supply

What are the 4 determinants of Short-run Aggregate supply?

A
  1. Resouce Prices
  2. Actions by the government
  3. Political or environmental phenonema
  4. Productivity
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13
Q

03.02 Aggregate Supply

Determinant of SRAS: Resource Prices (explain and its effect)

A

changes in input prices raw materials

  1. Resource prices fall → SRAS increases
  2. Resource prices rise → SRAS decrease
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14
Q

03.02 Aggregate Supply

Determinant of SRAS: Action by government (explain and its effect)

A

Changes in business taxes, business subsidies, and business regulations

  • SRAS decreases:
    • taxes rise
    • subsidies fall
    • regulations increase
  • SRAS increase:
    • taxes fall
    • subsidies rise
    • regulations decrease
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15
Q

03.02 Aggregate Supply

Determinant of SRAS: Political or environmental phenonema (explain and its effect)

A

Changes in inflationary expectations, wars, and natural disasters

  • SRAS decreases:
    • inflationary expectations increase
    • war or other natural disaster
  • SRAS increases:
    • inflationary expectations decrease
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16
Q

03.02 Aggregate Supply

Determinant of SRAS: Productivity (explain and its effect)

A

Changes in technology, worker education, or other factors that affect productivity

  • SRAS increases:
    • technology increases
    • education increase
    • productivity increase
  • SRAS decrease:
    • technology decreases
    • workers education decrease
    • productivity decrease
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17
Q

03.02 Aggregate Supply

New laws result in an influx of highly educated immigrants. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

1. increase

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18
Q

03.02 Aggregate Supply

Young adults of today, as a group, are more highly educated than the previous generation. The determinant causing the shift in this scenario is

  1. price.
  2. resource cost.
  3. productivity.
  4. government intervention (taxes, subsidies, or regulations).
  5. political or environmental phenomena
  6. consumer spending.
A

3. productivity

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19
Q

03.02 Aggregate Supply

Congress votes to substantially increase the minimum wage. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

2. decrease

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20
Q

03.02 Aggregate Supply

The government cuts business taxes by 10%. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

1. increase

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21
Q

03.02 Aggregate Supply

Congress votes to increase farm subsidies by 15%. The determinant causing the shift in this scenario is

  1. price.
  2. productivity.
  3. resource cost
  4. government intervention (taxes, subsidies, or regulations).
  5. political or environmental phenomena
  6. consumer spending.
  7. investment.
A

4. government intervention (taxes, subsidies, or regulations).

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22
Q

03.02 Aggregate Supply

A new process for producing glass revolutionizes the industry. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

increase

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23
Q

03.02 Aggregate Supply

A new process for producing glass revolutionizes the industry. The determinant causing the shift in this scenario is

  1. price.
  2. productivity.
  3. resource cost
  4. government intervention (taxes, subsidies, or regulations).
  5. political or environmental phenomena
  6. consumer spending.
A

2. productivity

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24
Q

03.02 Aggregate Supply

New sources of silicon are located in Wyoming. The determinant causing the shift in this scenario is

  1. price.
  2. productivity.
  3. resource cost
  4. government intervention (taxes, subsidies, or regulations).
  5. political or environmental phenomena
A
  1. resource cost
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25
Q

03.02 Aggregate Supply

Short-run aggregate supply

  1. is down sloping because producers supply less at higher prices.
  2. is up sloping because producers supply less at higher prices.
  3. shows how much Americans are willing and able to consume at each price level.
  4. shows the various amounts that producers are willing and able to produce at each price level.
  5. is up sloping because consumers demand more at higher prices.
A

4. shows the various amounts that producers are willing and able to produce at each price level

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26
Q

03.02 Aggregate Supply

Classical economists believe that

  1. the economy will adjust to at full employment of resources.
  2. the economy was never at full employment of resources.
  3. the producer can produce more of the product at the same price.
  4. the economy is approaching full employment as wages and prices increase.
  5. there are many unemployed resources.
A

1. the economy will adjust to at full employment of resources

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27
Q

03.02 Aggregate Supply

If a new microchip technology was infused into all production processes, then

  1. there is a movement down the AS curve as price level decreased.
  2. AS shifts right and price level would decrease.
  3. AS shifts right and price level would increase.
  4. AS shifts left and price level would decrease.
  5. AS shifts left and the price level would increase.
A

2. AS shifts right and price level would decrease

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28
Q

03.02 Aggregate Supply

If the best weather in years increased food production in the Midwest, then

  1. there is a movement down the AS curve as price level decreased.
  2. AS shifts right and price level would decrease.
  3. AS shifts right and price level would increase.
  4. AS shifts left and price level would decrease.
  5. AS shifts left and the price level would increase.
A

2.AS shifts right and price level would decrease

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29
Q

03.02 Aggregate Supply

If Midwestern farmers were awarded record subsidies, then

  1. there is a movement down the AS curve as price level decreased.
  2. AS shifts right and price level would decrease.
  3. AS shifts right and price level would increase.
  4. AS shifts left and price level would decrease.
  5. AS shifts left and the price level would increase.
A

2. AS shifts right and price level would decrease

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30
Q

03.02 Aggregate Supply

If an economic crisis caused the collapse of the automobile industry, then

  1. there is a movement down the AS curve as output decreased.
  2. AS shifts right and output would decrease.
  3. AS shifts right and output would increase.
  4. AS shifts left and output would decrease.
  5. AS shifts left and the output would increase.
A
  1. AS shifts left and output would decrease
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31
Q

03.02 Aggregate Supply

If subsidies were given to all road construction firms in the U.S as part of a stimulus package, then

  1. there is a movement down the AS curve as output decreased.
  2. AS shifts right and output would decrease.
  3. AS shifts right and output would increase.
  4. AS shifts left and output would decrease.
  5. AS shifts left and the output would increase.
A

3. AS shifts right and output would increase

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32
Q

03.02 Aggregate Supply

OPEC radically cuts back on the production of oil used by U.S. manufacturers. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

2. decrease

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33
Q

03.02 Aggregate Supply

OPEC radically cuts back on the production of oil used by U.S. manufacturers. The determinant causing the shift in this scenario is

  1. price.
  2. productivity.
  3. resource cost
  4. government intervention (taxes, subsidies, or regulations).
A

3. resource cost

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34
Q

03.02 Aggregate Supply

Consumer spending increases suddenly. Aggregate supply will

  1. increase.
  2. decrease.
  3. remain the same.
A

3.remain the same

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35
Q

03.02 Aggregate Supply

Which of the following statements is true about the Keynesian range of the short-run aggregate supply curve?

  1. Price level is increasing at all production levels.
  2. Price level is decreasing at all production levels.
  3. Price level is nearly constant at all production levels.
  4. Price level may increase or decrease as production increases or decreases.
  5. Output is constant at all production levels.
A

3. Price level is nearly constant at all production levels

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36
Q

03.02 Aggregate Supply

Which of the following statements is true about the Classical range of the short-run aggregate supply curve?

  1. Price level is decreasing at all production levels.
  2. Price level is constant at all production levels.
  3. Output is increasing at all production levels.
  4. Output may increase or decrease as price level increases or decreases.
  5. Output is nearly constant at all production levels.
A

5. Output is nearly constant at all production levels

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37
Q

03.02 Aggregate Supply

When the economy is at full employment of resources,

  1. the economy is operating in the vertical segment of the SRAS curve.
  2. the economy is operating in the intermediate segment of the SRAS curve.
  3. the economy is operating in the horizontal segment of the SRAS curve.
  4. there is no unemployment in the economy.
  5. there is no inflation in the economy.
A

1. the economy is operating in the vertical segment of the SRAS curve

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38
Q

03.02 Aggregate Supply

A healthy economy would operate

  1. in the Keynesian range of the SRAS.
  2. in the Intermediate range of the SRAS.
  3. in the Classical range of the SRAS.
  4. in the vertical range of the SRAS.
  5. in the horizontal range of the SRAS.
A

2. in the Intermediate range of the SRAS

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39
Q

03.02 Aggregate Supply

Keynes believed that

  1. the economy was always at full employment of resources.
  2. the economy was never at full employment of resources.
  3. the economy was self-correcting.
  4. any increase in demand will only be met with higher prices and little or no more production.
  5. wages and prices increase to attain full employment of resources.
A

2. the economy was never at full employment of resources.

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40
Q

03.02 Aggregate Supply

If the tourist industries were awarded subsidies due to the downturn in the economy, then

  1. there is a movement down the AS curve as output decreased.
  2. AS shifts right and output would decrease.
  3. AS shifts right and output would increase.
  4. AS shifts left and output would decrease.
  5. AS shifts left and the output would increase.
A

3. AS shifts right and output would increase

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41
Q

03.03 Aggregate Demand

Define aggregate demand (AD)?

A

Total quantity of output demanded by individuals (consumers), business (industry), and government at different price levels in a given time.

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42
Q

03.03 Aggregate Demand

How is aggregate demand different from demand?

A
  • Price of one good or service not really reflected in AD unless there is no substitute
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43
Q

03.03 Aggregate Demand

What is the formula for Aggregate Demand?

A

AD = C + Ig + G + (X – M)

  • AD - aggregate demand
  • C - consumer spending
  • Ig - investment spending
  • G - government purchases
  • (X - M) - Net Exports [exports - imports]
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44
Q

03.03 Aggregate Demand

How does Aggregate Demand compare to GDP?

A

AD about spending & GDP is about production

  • GDP not include transfer payments; no good or service is produced in transaction
  • AD include transfer payments; consumer spending change with change in income
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45
Q

03.03 Aggregate Demand

What is Consumer Spending (in relation to AD)?

A

All goods purchased (consumed) by households.

  • largest portion AD (2/3 percent)
  • Too much results in demand pull inflation
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46
Q

03.03 Aggregate Demand

What 4 concepts effect consumer spending?

A
  1. Consumer Wealth:
    • greater income = more consumer spending
    • less income = less consumer spending
  2. Consumer expectation:
    • except economy to do well = spend more money
  3. Consumer Indebtedness:
    • more debt = not spend more new money
  4. Taxes and transfer payments:
    • lower taxes = more money to spend
    • higher taxes = decreases spending ability
    • –
    • more transfer payments = more income to save and spend
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47
Q

03.03 Aggregate Demand

What is investment spending and what are the 4 determinants?

A
  • All goods and services purchased by businesses make products.*
  • Gross private investment; not net investment*
  1. Interest Rates:
    • lowerst rates → stimuate investment spending
    • higher rates → less investment spending
  2. Profit expectations on projects:
    • business except high profits → more likely borrow money for investment spending
  3. Degree of excess capacity: (how much factory space is used)
    • high degree excess capacity = lot empty room = no need engage investment spending
    • low degree = encourage investment spending
  4. Producer confidence:
    • except economy improve = increase investment spending
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48
Q

03.03 Aggregate Demand

Define Government Spending (AD)

A

Purchased by government (not transfer payments)

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49
Q

03.03 Aggregate Demand

Describe the aggergate demand curve

A
  • similar demand curve
  • Slope increase - real gross domestic product will be lower and as price levels drop
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50
Q

03.03 Aggregate Demand

What is the difference between price and price level?

A
  • Price: supply and demand curve & indicates how much one product will cost at each point
  • Price Level: average price all goods and services in economy
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51
Q

03.03 Aggregate Demand

What are the three reasons the AD is downwards sloping?

A
  1. Wealth Affect:
    • Price rise → real value of household income decline and consumer spending drops
    • Drop = decrease in real GDP
  2. Interest Rate Affect:
    • Price rise - real value household income declines
      • Continue current lifestyle: borrow money
      • Increase demands for loans → increase interest rate
      • Interest rates increase →
      1. less investment spending by businesses
      2. consumers put off buying high ticket items like homes
      3. decrease real GDP
    • Price drop - interest rates decrease
      • consumer and investment spending increase
      • increase real GDP
  3. Net Exports (Foreign Trade) Effect:
    • price rise: buy cheaper goods & fewer domestic products = decrease net exports
    • Demand foreign products increase = interest rates abroad increase
    • Domestic” more appealing put money overseas assests rather keeping in domestic financial assets
      • decrease real GDP
    • Price decrease: reverse
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52
Q

03.03 Aggregate Demand

Congress decreases personal income taxes. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

1. increase

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53
Q

03.03 Aggregate Demand

Congress decreases personal income taxes. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
  7. Resource cost
  8. Government intervention (taxes, subsidies, or regulations)
  9. None of the above
A

2. Consumer spending

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54
Q

03.03 Aggregate Demand

Consumers rush to purchase new gaming systems and other electronic goods. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same
A

1. increase

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55
Q

03.03 Aggregate Demand

Consumers rush to purchase new gaming systems and other electronic goods. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
A

2. Consumer spending

56
Q

03.03 Aggregate Demand

Manufacturers begin building a new plant in Arizona. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same
A

1. increase.

57
Q

03.03 Aggregate Demand

Manufacturers begin building a new plant in Arizona. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
A

3. Investment spending

58
Q

03.03 Aggregate Demand

Congress authorizes expansion of the shuttle program. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same
A

1. increase

59
Q

03.03 Aggregate Demand

Congress authorizes expansion of the shuttle program. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
A

4. Government spending

60
Q

03.03 Aggregate Demand

Imports of foreign automobiles increase 10%. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

2. decrease

61
Q

03.03 Aggregate Demand

Imports of foreign automobiles increase 10%. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
A

5. Net exports

62
Q

03.03 Aggregate Demand

Fair weather helps produce the largest crop of peanuts in a decade. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

3. remain the same

63
Q

03.03 Aggregate Demand

Fair weather helps produce the largest crop of peanuts in a decade. Which determinant of aggregate demand causes the change?

  1. Price
  2. Consumer spending
  3. Investment spending
  4. Government spending
  5. Net exports
  6. Productivity
  7. Resource cost
  8. Government intervention (taxes, subsidies, or regulations)
  9. None of the above
A

9. None of the above

64
Q

03.03 Aggregate Demand

Unemployment drops as more jobless Americans find positions in local businesses. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

1. increase

65
Q

03.03 Aggregate Demand

Tourists flock to the United States for vacation after disposable income rises in Europe. Aggregate demand will

  1. decrease.
  2. increase.
  3. remain the same.
A

2. increase

66
Q

03.03 Aggregate Demand

The Government Accounting Office (GAO) announces deep cuts to social security, Medicare, and welfare programs. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same
A

2. decrease

67
Q

03.03 Aggregate Demand

The wealth effect states that

  1. as price levels fall, interest rates decrease and real GDP increases.
  2. as prices rise in an economy, consumers tend to buy cheaper foreign products and fewer domestic products.
  3. if price levels drop, the value of money is higher, and consumers will spend more.
  4. aggregate demand can increase any time there is an increase in consumption, investment, government spending, or net exports.
  5. aggregate demand can decrease any time there is a decrease in consumption, investment, government spending, or net exports.
A

3. if price levels drop, the value of money is higher, and consumers will spend more

68
Q

03.03 Aggregate Demand

The interest rate effect states that

  1. as price levels fall, interest rates decrease and real GDP increases.
  2. as prices rise in an economy, consumers tend to buy cheaper foreign products and fewer domestic products.
  3. if price levels drop, the value of money is higher, and consumers will spend more.
  4. aggregate demand can increase any time there is an increase in consumption, investment, government spending, or net exports.
  5. aggregate demand can decrease any time there is a decrease in consumption, investment, government spending, or net exports.
A

1. as price levels fall, interest rates decrease and real GDP increases

69
Q

03.03 Aggregate Demand

The exchange rate effect states that

  1. as price levels fall, interest rates decrease and real GDP increases.
  2. as prices rise in an economy, consumers tend to buy cheaper foreign products and fewer domestic products.
  3. if price levels drop, the value of money is higher, and consumers will spend more.
  4. aggregate demand can increase any time there is an increase in consumption, investment, government spending, or net exports.
  5. aggregate demand can decrease any time there is a decrease in consumption, investment, government spending, or net exports.
A

2. as prices rise in an economy, consumers tend to buy cheaper foreign products and fewer domestic products

70
Q

03.03 Aggregate Demand

Newspapers report that consumer debt is at an all time high. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

2. decrease

71
Q

03.03 Aggregate Demand

Personal income tax cuts increase consumer incentive to save and spend. Aggregate demand will

  1. increase.
  2. decrease.
  3. remain the same.
A

1. increase

72
Q

03.03 Aggregate Demand

Tax cuts increase consumer incentive to save. Which determinant(s) of aggregate demand cause the change?

  1. Price
  2. Consumer spending only
  3. Investment spending and consumer spending
  4. Government intervention (taxes, subsidies, or regulations)
  5. Productivity and consumer spending
A

3. Investment spending and consumer spending

73
Q

03.03 Aggregate Demand

Aggregate demand is the total quantity of

  1. consumer spending, government spending, investment spending and exports supplied in an economy during a given time period.
  2. consumer spending, government spending and investment spending in an economy during a given time period.
  3. output supplied by individuals (consumers), businesses (industry), and the government at different price levels in a given time period.
  4. of output produced by individuals (consumers), businesses (industry), and the government at different price levels in a given time period.
  5. output demanded by individuals (consumers), businesses (industry), and the government at different price levels in a given time period.
A

5. output demanded by individuals (consumers), businesses (industry), and the government at different price levels in a given time period

74
Q

03.03 Aggregate Demand

When price level decreases,

  1. AD will shift left.
  2. AD will shift right.
  3. there will be a movement to the right along the AD curve.
  4. there will be a movement to the left along the AD curve.
  5. a corresponding decrease in output will always occur.
A

3. there will be a movement to the right along the AD curve

75
Q

03.03 Aggregate Demand

All of the following will cause an increase in aggregate demand except an increase in

  1. consumer confidence.
  2. business inventories.
  3. personal income taxes.
  4. national exports.
  5. road projects.
A

3. personal income taxes

76
Q

03.03 Aggregate Demand

All of the following will cause a decrease in aggregate demand except

  1. an increase in imports.
  2. an increase in exports.
  3. a decrease in consumer spending.
  4. a decrease in national income.
  5. a decrease in business expansion.
A

2. an increase in exports

77
Q

03.03 Aggregate Demand

If consumer debt increases as a result of a nationwide spending spree, then

  1. there is a movement down the AD curve as output decreased.
  2. AD shifts right and output would decrease.
  3. AD shifts right and output would increase.
  4. AD shifts left and output would decrease.
  5. AD shifts left and the output would increase.
A

4. AD shifts left and output would decrease

78
Q

03.03 Aggregate Demand

If consumer wealth decreases as the stock market plunges, then

  1. there is a movement down the AD curve as price level decreased.
  2. AD shifts right and price level would decrease.
  3. AD shifts right and price level would increase.
  4. AD shifts left and price level would decrease.
  5. AD shifts left and the price level would increase.
A

4. AD shifts left and price level would decrease

79
Q

03.03 Aggregate Demand

If consumer wealth increases as the stock market rebounds, then

  1. there is a movement down the AD curve as output decreased.
  2. AD shifts right and output would decrease.
  3. AD shifts right and output would increase.
  4. AD shifts left and output would decrease.
  5. AD shifts left and the output would increase.
A

3. AD shifts right and output would increase

80
Q

03.03 Aggregate Demand

If interest rates increase, then

  1. there is a movement down the AD curve as output decreased.
  2. AD shifts right and output would decrease.
  3. AD shifts right and output would increase.
  4. AD shifts left and output would decrease.
  5. AD shifts left and the output would increase.
A

4. AD shifts left and output would decrease

81
Q

03.03 Aggregate Demand

If interest rates decrease, then

  1. there is a movement down the AD curve as price level decreased.
  2. AD shifts right and price level would decrease.
  3. AD shifts right and price level would increase.
  4. AD shifts left and price level would decrease.
  5. AD shifts left and the price level would increase.
A

3. AD shifts right and price level would increase

82
Q

If foreigners find U.S. goods more desirable and less costly, then

  1. there is a movement down the AD curve as price level decreased.
  2. AD shifts right and price level would decrease.
  3. AD shifts right and price level would increase.
  4. AD shifts left and price level would decrease.
  5. AD shifts left and the price level would increase.
A

3. AD shifts right and price level would increase

83
Q

03.04 The Expenditure and Tax Multipleirs

03.04 THE EXPENDITURE AND TAX MULTIPLIERS

84
Q

03.04 The Expenditure and Tax Multipleirs

Define marginal prospensity to consume (MPC):

A

Change in the amount of additional income you are willing to spend on buying some consumer goods or services divided by change in disposable income

{Change in Consumer Spending} ÷ {Change in Income}

  • how much you spend of every extra dollar you earn
  • MPC = ΔConsumption /ΔIncome
85
Q

03.04 The Expenditure and Tax Multipleirs

Define marginal propensity to save (MPS):

A

Change in amount of additional income you are willing to save (not spend) on consumer goods divided change disposable income.

  • {Change in saving} ÷ {Change in income}
  • MPS = ΔSavings/ΔDisposable Income
  • spend of every extra dollar you earn
86
Q

03.04 The Expenditure and Tax Multipleirs

What is MPC + MPS?

A

MPC + MPS will always equal “1”

87
Q

03.04 The Expenditure and Tax Multipleirs

What is the multiplier effect?

A

When you spend a dollar, whomever you give it to spends it, and that company or person spends it, and so on and so on

  • consumer, government, investment spending chagnes - economy exands more than just initial value
89
Q

03.04 The Expenditure and Tax Multipleirs

What is the Expenditure Multiplier formula?

A

Expenditure (Spending) Multiplier:

  1. 1/(1-MPC)
  2. 1/MPS
  3. (ΔGDP)/(ΔSpending)

ΔExpenditures (Spending) × Multiplier = ΔGDP

90
Q

03.04 The Expenditure and Tax Multipleirs

What is the formula for tax multiplier?

A

Tax Multiplier =

  1. –MPC / MPS
  2. (ΔGDP) / (ΔTaxes)

ΔTaxes × Multiplier = ΔGDP

91
Q

03.04 The Expenditure and Tax Multipleirs

How do you calculate the change in GDP of the exchange multiplier?

A

ΔGDP = Multiplier x Δ(spending or taxes)

92
Q

03.04 The Expenditure and Tax Multipleirs

Why is the tax multiplier always less than the expenditure multiplier?

A
  • change government spending hits economy right away
  • Delayed impact in change of taxes
    • adjust what people do with savings when personal taxes change
      • Decrease: save some of what they get back
      • Increase: take money out of savings
93
Q

03.04 The Expenditure and Tax Multipleirs

What are the most frequently used multipliers?

94
Q

03.04 The Expenditure and Tax Multipleirs

What is the Balanced Budget Multiplier?

A
  • Government wants to increase GDP without increasing national debt

How:

  1. change taxes and spending by same amount
  2. balanced budget multiplier used creating change in GDP equal change in government spending

Balanced Budget Multiplier:

  • equal to 1
95
Q

03.05 Equilibrium in the AD and AS Model

03.05 Equilibrium in the AD/AS Model

96
Q

03.05 Equilibrium in the AD and AS Model

Describe the aggregate demand curve in long-run equilibrium:

A

Must equal short-run aggregate supply curve (SRAS) and long-run aggragate supply curve (LRAS)

full employment and most efficient

97
Q

03.05 Equilibrium in the AD and AS Model

Describe the type of unemployment that exists in the economy in the long-run equilibrium.

A

Structural and frictional unemployment

Intersection above or below: more or less unemployment

98
Q

03.05 Equilibrium in the AD and AS Model

How does the graph look if there is an inflationary gap?

A

equilibrium is above full employment

99
Q

03.05 Equilibrium in the AD and AS Model

How does the graph look if there is a recessionary gap?

A

equilibrium is below full employment

100
Q

03.05 Equilibrium in the AD and AS Model

How does stagflation occur?

A
  • SRAS shifts left = stagflation
  • Price levels increase (inflation) & output decrease (unemployment)
    • increase inflation
    • decrease unemployment
101
Q

03.06 Economic Growth and Productivity

102
Q

What is the most importantt factor impacting real economic growth?

A

PRODUCTIVITY

103
Q

How is productivity estimated and how does it grow?

A

Productivty = Real Output ÷ Input

Factors:

  1. increase real investment or capital
  2. improvement in workers skills (human capital)
  3. technological advancement
  4. legal and social environment that rewwards achievement and improves economic organization
  5. new resources
105
Q

How does interest rates contribute to economic growth? How do banks use money?

A
  • investment spending dependent on interest rates
  • Uses money to loan out to businesses
    • increases investment spneidng
    • Long-run: more capital investment occurs
      • increase economic growth

Change interest rates → change in economic growth caused by change in capital investment

106
Q

What is the Rule of 70?

A
  • Divide 70 by annual percentage rate of growth
  • determine how long it taks GDP to double
107
Q

What is the different between economic growth and productivity?

A

Economic growth is changed by new resources (including capital investment) and productivity and refers to long-run activities in the economy.

On the AP exam, always assume the question is asking about the short-run unless the question specifically mentions economic growth or long-run changes.

108
Q

03.07 Keynesian Economics and Fiscal Policy

06.07 Keynesian Economic and Fiscal Policy

109
Q

03.07 Keynesian Economics and Fiscal Policy

What is Keynesian Theory based on?

A
  • economy may be in equilibrium in short-run (either above or below full employment)

Truth:

  • economy is inherently unstable
  • not enough demand goods and services
110
Q

03.07 Keynesian Economics and Fiscal Policy

How does Keynesians regard price levels?

A
  • not a factor
    • output is constantly changing but price levels stable
    • prices and wages “sticky” or downwardly inflexible
  • Result:
    • government actively pursue monetary policies (Federal Reserves Bank) & fiscal policies (Congress and most reliable)
    • why: reach price level, employment, output goals
  • Shift AD as method of controlling the economy
111
Q

03.07 Keynesian Economics and Fiscal Policy

What is the role of the government in Keynesian Theory?

A

Role to correct problems in the economy

  • close tabs on economy to ensure that inflation or recession does not cause problems
  • Problem: discretionary fiscal policy correct it
    • discretionary → take some sort of actions using specific tools
    1. change government expenditures or tax
112
Q

03.07 Keynesian Economics and Fiscal Policy

How can the government improve the economy if it slowed down (or a recession is comming)?

A

Increase Aggregate Demand → increase government expenditure

Example:

  1. increase wages government employees (teachers)
  2. increase spending on roads to build infrustructure
113
Q

03.07 Keynesian Economics and Fiscal Policy

What does the government do when the economy is growing too rapidly?

A

Decrease AD

  1. delay or cancel road repairs
  2. cancel grants teachers
114
Q

03.07 Keynesian Economics and Fiscal Policy

What is the relationship between government spending and AD?

A

An increase in government spending directly increases AD and a decrease in government spending directly decreases AD.

115
Q

03.07 Keynesian Economics and Fiscal Policy

What are the two ways the government can intervene in the economy?

A
  1. Increase or decrease government spending
  2. increase or decrease taxes
116
Q

03.07 Keynesian Economics and Fiscal Policy

How can the government intervene in the economy through taxation?

A
  1. Personal income tax
  2. excise tax (taxes required on specific goods or services like fuel, tobacco, and alcohol)
  3. corporate taxes
117
Q

03.07 Keynesian Economics and Fiscal Policy

How does the Keynesians think taxation should be implimented

A

Advocate change in personal income tax (goal is to shift AD)

118
Q

03.07 Keynesian Economics and Fiscal Policy

How can the government respond to a slowing economy (besides increasing government spending)? What can be done if the economy is moving to fast?

A

Slower: Lower taxes

Faster: increase taxes

119
Q

03.07 Keynesian Economics and Fiscal Policy

Why would the government change both government expenditure and taxation?

A

Ensure the federal budget is balanced

120
Q

03.07 Keynesian Economics and Fiscal Policy

What are the Fiscal Policy tools?

A

Increase aggregate demand to stimulate growth:

1. Government expenditure:

Increase government spending on programs.

Leads to:

  • increased aggregate demand
  • more people with jobs
  • more income
  • more spending
  • increased employment
  • more output

2. Personal Income taxes:

Decrease (cut) personal income taxes leads to more disposable income for consumers. Consumption increases which leads to increased aggregate demand.

Decrease aggregate demand to slow growth:

1. Government expenditure:

Decrease or cut government spending on programs.

Leads to:

  • decreased aggregate demand
  • federal workers cutback in pay
  • less income
  • less spending
  • decreased employment
  • less output

2. Personal Income taxes:

Increase (raise) personal income taxes leads to less disposable income for consumers. Consumption decreases which leads to decreased aggregate demand.

121
Q

03.07 Keynesian Economics and Fiscal Policy

What are the steps to solve a multiplier problem?

A

Step 01: Find the difference between real and potential GDP

Step 02: Determine if you need to increase or decrease AD.

Always want to be at potential GDP rather than RGDP

Step 03: Find tax and expenditure multipliers

  • Expenditure Multiplier: 1/(1 - MPC)
  • Find MPS: 1 - MPC
  • Tax Multiplier: MPC / MPS

Step 04: Divide difference between real and potential GPD by tax and expenditure multipliers

Step 05: Determine if you increase of decrease taxes and Expenditure

122
Q

03.07 Keynesian Economics and Fiscal Policy

What is the difference between expansionary monetary policies and contractionary monetary policies?

A

Expansionary monetary policy is simply a policy which expands (increases) the supply of money, whereas contractionary monetary policy contracts (decreases) the supply of a country’s currency.Dec 23, 2018

123
Q

03.07 Keynesian Economics and Fiscal Policy

When looking at an AD/AS graph with LRAS, the intersection of AD/AS

  1. is potential GDP and LRAS represents full employment GDP.
  2. represents full employment GDP and LRAS is potential GDP.
  3. represents full employment GDP and LRAS represents RGDP
  4. represents RGDP and LRAS is potential GDP.
  5. is potential GDP and LRAS represents RGDP.
A

4. represents RGDP and LRAS is potential GDP

124
Q

03.07 Keynesian Economics and Fiscal Policy

What is the problem in the economy illustrated in the graph above?

  1. Stagflation
  2. Inflation
  3. Unemployment
  4. Expansion
  5. Economic growth
A

3. Unemployment

125
Q

03.07 Keynesian Economics and Fiscal Policy

If Congress wants to increase aggregate demand, they could

  1. increase the amount of personal income taxes an individual pays.
  2. decrease the amount of personal income taxes an individual pays.
  3. decrease exports out of the nation.
  4. decrease government purchases in the economy.
  5. increase imports into the nation.
A

2. decrease the amount of personal income taxes an individual pays

126
Q

03.07 Keynesian Economics and Fiscal Policy

If the government increases personal taxes, then

  1. output will increase and price level will decrease.
  2. output will decrease and price level will increase.
  3. output and price level will increase.
  4. output and price level will decrease.
  5. output will increase and price level will be indeterminate.
A

4. output and price level will decrease

127
Q

03.07 Keynesian Economics and Fiscal Policy

If real GDP is $200 billion, full employment GDP is $500 billion, and the marginal propensity to consume is 0.75, then Congress should

  1. decrease taxes by $50 billion.
  2. increase government purchases by $50 billion.
  3. decrease government purchases by $50 billion.
  4. decrease taxes by $100 billion.
  5. increase government purchases by $300 billion.
A

4. decrease taxes by $100 billion

128
Q

03.07 Keynesian Economics and Fiscal Policy

If real GDP is $400 billion, full employment GDP is $800 billion, and the marginal propensity to consume is 0.5, then Congress should

  1. decrease taxes by $200 billion.
  2. increase taxes by $400 billion.
  3. increase purchases by an amount slightly more than $200 billion.
  4. increase purchases by $200 billion.
  5. increase purchases by $400 billion.
A

4. increase purchases by $200 billion

129
Q

03.07 Keynesian Economics and Fiscal Policy

An example of a government transfer of funds would include

  1. wages paid to the President as part of his salary.
  2. Social Security paid to retired department of defense workers.
  3. funds paid to secret service agents who protect the President.
  4. expenses paid for grounds maintenance at the white house.
  5. funds transferred when the President or members of Congress acquire a new bullet-proof limousine.
A

2. Social Security paid to retired department of defense workers

130
Q

03.07 Keynesian Economics and Fiscal Policy

A change in personal income taxes impact gross domestic product through a change in

  1. government spending.
  2. investment spending.
  3. autonomous consumer spending.
  4. disposable income.
  5. net exports.
A

4. disposable income

131
Q

03.07 Keynesian Economics and Fiscal Policy

Using the graph above, the government should

  1. increase taxes to close the inflationary gap.
  2. decrease taxes to close the inflationary gap.
  3. increase spending to close the inflationary gap.
  4. decrease spending to close the recessionary gap.
  5. decrease taxes to close the recessionary gap.
A

5. decrease taxes to close the recessionary gap

132
Q

03.07 Keynesian Economics and Fiscal Policy

The government of an economy in equilibrium above potential output should

  1. increase taxes to close the inflationary gap.
  2. decrease taxes to close the inflationary gap.
  3. increase spending to close the inflationary gap.
  4. decrease spending to close the recessionary gap.
  5. decrease taxes to close the recessionary gap.
A

1. increase taxes to close the inflationary gap

133
Q

03.07 Keynesian Economics and Fiscal Policy

Assume an economy in long-run equilibrium. If there is a rise in the stock market that increases the value of stocks held by households, which of the following will be true?

I. Inflationary gap develops.

II. Recessionary gap develops.

III. Expansionary policy should be used to return the economy to equilibrium.

IV. Contractionary policy should be used to return the economy to equilibrium.

V. Economy remains in long-run equilibrium.

  1. V only.
  2. I and III only.
  3. II and III only.
  4. I and IV only.
  5. II and IV only.
A

4. I and IV only

134
Q

03.07 Keynesian Economics and Fiscal Policy

Assume an economy in long-run equilibrium. If in an effort to reduce the debt the government decides to decrease spending on social programs, which of the following will be true?

I. Inflationary gap develops.

II. Recessionary gap develops.

III. Expansionary policy should be used to return the economy to equilibrium.

IV. Contractionary policy should be used to return the economy to equilibrium.

V. Economy remains in long-run equilibrium.

  1. V only.
  2. I and III only.
  3. II and III only.
  4. I and IV only.
  5. II and IV only.
A

3. II and III only

135
Q

03.07 Keynesian Economics and Fiscal Policy

Which of the following correctly describes the cause and effect chain for a decrease in personal income taxes?

  1. A decrease in taxes will decrease disposable income which increases consumer spending and shifts AD right.
  2. A decrease in taxes will increase disposable income which increases consumer spending and shifts AD left.
  3. A decrease in taxes will decrease disposable income which decreases consumer spending and shifts AD right.
  4. A decrease in taxes will decrease disposable income which increases consumer spending and shifts AD left.
  5. A decrease in taxes will increase disposable income which increases consumer spending and shifts AD right.
A

5. A decrease in taxes will increase disposable income which increases consumer spending and shifts AD right

136
Q

03.07 Keynesian Economics and Fiscal Policy

Which of the following correctly describes the cause and effect chain for an increase in personal income taxes?

  1. An increase in taxes will decrease disposable income which increases consumer spending and shifts AD right.
  2. An increase in taxes will increase disposable income which increases consumer spending and shifts AD left.
  3. An increase in taxes will decrease disposable income which decreases consumer spending and shifts AD right.
  4. An increase in taxes will decrease disposable income which decreases consumer spending and shifts AD left.
  5. An increase in taxes will increase disposable income which increases consumer spending and shifts AD right.
A

4. An increase in taxes will decrease disposable income which decreases consumer spending and shifts AD left

AP Macroeconomics (6 decks)

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