Unit 3

Question 1

Why is the AD Curve downward sloping?

Answer 1

Wealth Effect-Interest Rate Effect-Exchange Rate Effect WIE

Question 2

Define the Wealth Effect

Answer 2

Higher price levels reduce the purchasing power of money. This decreases the quantity of expenditures.

Question 3

Define the Interest Rate Effect

Answer 3

When the PL increases, lenders need to charge higher interest rates to get a real return on their loans; higher interest rates discourage consumer spending and business investment.

Question 4

Define the Exchange Rate Effect

Answer 4

When U.S PL rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods.

Question 5

What are the shifters of AD?

Answer 5

C/Ig/G/Xn

Question 6

Define the Marginal Propensity to Save (MPS)

Answer 6

How much people save rather than consume when there is a change in disposable income; MPS= Change in Savings/ Change in DI

Question 7

Define the Marginal Propensity to Consume (MPC)

Answer 7

How much people consume rather than save when there is a change in disposable income; MPC= Change in Consumption/ Change in DI

Question 8

What is the equation for the Spending Multiplier (SM)?

Answer 8

1/MPS

Question 9

What is the equation for the Simple Tax Multiplier (TM)?

Answer 9

MPC/MPS

Question 10

What are the shifters of SRAS?

Answer 10

Change in the Price of Resources-Changes in Taxes/Subsidies/Regulations- Change in Productivity-Expectations of Inflation S-PTPI

Question 11

How will SRAS shift if there is an expectation of an increase in Inflation?

Answer 11

Left

Question 12

Define Negative Supply Shock

Answer 12

When you run out of a key resource; SRAS shifted to the left.

Question 13

What happens when everything else is at equilibrium but SRAS is shifted to the left?

Answer 13

Stagflation

Question 14

Define Positive Supply Shock

Answer 14

You have more of a key resource; the SRAS would be shifted to the right.

Question 15

Define Expansionary Fiscal Policy

Answer 15

Laws that reduce unemployment and increase GDP; increase in government spending and decrease in taxes (combination of 2)

Question 16

Define Contractionary Fiscal Policy

Answer 16

Laws that reduce inflation, decrease GDP; decrease in government spending and increase in taxes (combination of 2)

Question 17

Define Discretionary Fiscal Policy

Answer 17

Congress creates a new bill that is designed to change AD through government spending or taxation; one problem is lag time due to the bureaucracy.

Question 18

Define Non-Discretionary Fiscal Policy

Answer 18

(Also called Automatic Stabilizers); permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy. When GDP goes down, government spending automatically increases and taxes automatically fall.

Question 19

Define Aggregate Demand

Answer 19

Real GDP desired at each price level.

Question 20

Define Aggregate Supply

Answer 20

Total real output produced at each price level; relationship depends on time horizon.

Question 21

Define Average Propensity to Consume (APC)

Answer 21

fraction of total income consumed (APC=Consumption/Income)

Question 22

Define Average Propensity to Save (APS)

Answer 22

fraction of total income saved. (Savings/Income)

Question 23

The sum of propensities to save and consume ALWAYS equal to _____.

Answer 23

1

Question 24

There is an _____ relationship between income and Average Propensity to Consume.

Answer 24

Inverse

Question 25

There is a _____ relationship between income and Average Propensity to Save.

Answer 25

Direct

Question 26

How do you calculate the Expected Rate of Return?

Answer 26

Net Revenue-Cost/Cost x100

Question 27

What is the relationship between expected inflation and unemployment rate?

Answer 27

Inverse

Question 28

If AD changes, you make a left/right movement on the _____ curve in the Philip’s Model Curve

Answer 28

Left/Right

Question 29

When there is a change in SRAS, the SRPC either moves _____ or _____

Answer 29

Up or Down (for example if SRAS moves left, SRPC moves up)

Question 30

Deceasing structural and/or frictional unemployment will _____ LRPC.

Answer 30

Decrease

Question 31

Increasing structural and/or frictional unemployment will _____ LRPC.

Answer 31

Increase

Question 32

LRPC will shift to the _____ to show growth.

Answer 32

Left