Unit 1 3 National Income and Price Determination

Question 1

why aggregate demand is downward sloping

Answer 1

wealth effect
interest rate effect
foreign price effect

Question 2

wealth effect

Answer 2

as price lebel decreases, purchasing power increases and people buy more

Question 3

interest rate effect

Answer 3

as interest rates inc, cons and bus become more hesistant to borrow money and AD dec

Question 4

foreign price effect

Answer 4

when inflation is down and currency inc in value, the dollar has appreciated in value and gives people w/ US dollar stronger buying power to purchase foreign goods = AD lowered

Question 5

shifters of aggregate demand

Answer 5

C: expectations, debt, tazes, overall-wealth, transfer payments
G: spending, tazes, transfers, national policies
I: real interest rates, tech, confidence, taxes, overall wealth
X-n: currecny exchange rates, national income

Question 6

multiplier effect

Answer 6

an inc or dec in one economic activity causes an inc or dec aacross a range of economic activities

Question 7

marginal prospensity to consume

Answer 7

the percent of new income a consumer spends on g and s compared to what they save
as hh income inc, spending dec
as di inc, so does cons

Question 8

marginal propensity to save

Answer 8

percent of new income not use for consumption
as hh income lowers so does saving

Question 9

spending multiplier eq

Answer 9

1/MPS

Question 10

tax multiplier ec

Answer 10

mpc/mps

Question 11

why LRAS is vertical

Answer 11

in the long run, an economys potential output is determined by its resources and not by price level
represnets full enmployment output/potential output

Question 12

negative supply shock

Answer 12

AS lowers and shifts let
production costs inc and output dec
APL and U up

Question 13

positive supply shpck

Answer 13

AS inc and shifts right
production costs dec and output inc
APL and U down

Question 14

stagflation

Answer 14

form of negative supply shock that happens when inflation meets salled economic growth/output and U rises

Question 15

autonomous consumption

Answer 15

expenditures consumers make regardless of income level

Question 16

disposable income

Answer 16

the income hh have available for spending and saving after taxes and autonomous spending

Question 17

how the economy self adjusts in long run when there is a negative output gap

Answer 17

wages and prices fall, keading to a right shift in SRAS, restoring potential output

Question 18

how the economy self adjusts in long run when there is a positive output gap

Answer 18

rising demand and low U push wages and prices up, causing Sras to shift up

Question 19

expansionary fiscal policy

Answer 19

policy to increase AD to rGDp by inc spending and transgers and dec tazes during a recession

Question 20

contractionary fiscal policy

Answer 20

during an inflationary period, gov lowers spending and transers and raises taxes to decrease AD

Question 21

discretionary fiscal policy

Answer 21

results from active gov action to change spending or taxes

Question 22

non discretionary fiscal policy

Answer 22

automatic gov spending and tax policies triggered by economic conditions like U and inflation

Question 23

automatic stabalizers examples

Answer 23

unemployment insurance, medicaid, progressive income tax structure

Question 24

aggregate demand

Answer 24

all finished goods and services at various price levels in a given period of time

Question 25

MPC formula

Answer 25

change in consumption/change in disposible income

Question 26

MPS formula

Answer 26

change in spending/change in dispisle income

Question 27

total change in GDP formula

Answer 27

(tax/spending multiplier)(change in spending/tax) = total change in gdp

Question 28

short run aggregate supply

Answer 28

refers to the fact that producers have fized variable costs that limit their ability and flexibility to respobd to market changes and maintain profits has to reduce supply to combat shock bc reducing resouraces, production costs, and awages are stikcy

Question 29

nominal wages

Answer 29

dollar amounts paid to employees and arent easily changed (contracts, losing employees, employee resentment, high expectations)

Question 30

sticky wages

Answer 30

when nominal wages are slow to rise or fall in reesponse to changes in the economy

Question 31

nominal price rigidity

Answer 31

prices for g and s that are fize dor not very flexible

Question 32

pricing power

Answer 32

conpanies can inc or dec price and output, inc profit per unit

Question 33

long run aggregate supply curve

Answer 33

refers to the time frame when price levels, wages, and contracts can adjust to the changesin the economy shows relationsip b/w APL and quanity of A output that would exist if all costs were flexible tends to shift right over time

Question 34

output gap

Answer 34

difference b.w full employment output and rGDP is the output gap

Question 35

inflationary gap

Answer 35

when AD for g and s is less than AS produciton is high due to low unemployment and cons have more DI, more trade, or gov purchase AD shifts right and E is above EFe

Question 36

recessionary gap

Answer 36

when an economy is operating below full employment equilibirum demand is down, U will rise and prices will drop

Question 37

aggregate demand shock

Answer 37

an unforseen event or occurance that causes an inc or dec in demand for g and s

Question 38

positive demand shock

Answer 38

inc in AD and shift to tht right rising prices, inc output and dec U can be intentional sras shifts rght by supplying more

Question 39

negative demand shock

Answer 39

dec in AD and shift left sras shifts left

Question 40

sras shock

Answer 40

smth unforseen quicjly and drmatically changes product supply levels

Question 41

demand pull inflation

Answer 41

when demand inc too fast for supply and price inc due to eonomic growth, export surge, gov spending, inflation expectations, more money in the system

Question 42

cost push inflation

Answer 42

occurs when supply dec due to inc cost of matierals and wages causes: inc cost of raw materials, wage inc, natural hazards

Question 43

fiscal policy

Answer 43

congressional change in spending and tazes to affect overall spending based off of keyens belief

Question 44

automatic stabalizers

Answer 44

fiscal policies that help moderate flucutations in an economy during the business cycle which occur w/out special gov action progressive income structure, unemployment insurance, supplemental nutrition assistance, and medicaid

Question 45

progressive income tax structure

Answer 45

as income inc, tax moderates swings in the economy recession: income dec = tax dec = more DI = more AD

Question 46

unemployment insurance

Answer 46

gives newly employed workers soem money until they find a new job FUTA

Question 47

supplemental nutrition assistance program

Answer 47

food stamps

Question 48

medicaid

Answer 48

funds health insurance for people w/ low or no income payments inc when economy contracts

Question 49

gov transfers

Answer 49

payments to people with no g or s in return welfare programs for people under federal poverty line