Unit 3

Question 1

Product Market

Answer 1

The “place” where goods and services produced by businesses are sold to households

Question 2

The factor market

Answer 2

The place where resources (land, labor, capital and entrepreneurship) are sold to businesses

Question 3

Private Sector

Answer 3

Part of the economy that is run by individuals and businesses

Question 4

Public Sector

Answer 4

Part of the economy that is controlled by the government

Question 5

Factor Payments

Answer 5

Payments for the factors of production (rent, wages, interest and profit)

Question 6

Transfer Payments

Answer 6

When the govt redistributes income (welfare, social security)

Question 7

Market

Answer 7

Location or mechanism that allows buyers and sellers to exchange a specific product

Question 8

Aggregate Demand
PL decreases (deflation)

Answer 8

The real GDP demanded increases and vice verca

Question 9

AD is downward sloping because…

Answer 9

The wealth effect (wealthier when price drops)
Interest rate effect - when the PL increase lenders need to charge higher interest rates. -> less people borrow
Foreign trade effect - when US PL increases and foreign buyers buy less goods and Americans buy more foreign goods (Exports increase and Imports decrease) can work both ways

Question 10

AD Shifters

Answer 10

1) Change in consumer spending (increased disposable income, expectations, household debt, taxes)
2) Changes in investment spending (real interest rates , taxes on return investment)
3) Changes in government spending ( decreased spending = decreased AD)
4) Changes in Net Exports - value of dollar changes aggravate demand. ( dollar increase = decreased AD)

Question 11

Fiscal Policy

Answer 11

Increases or decrease in government spending. Controlled by Congress when they increase spending shifts curve right = GDP Increases

Question 12

Monetary Policy

Answer 12

Controlled by the federal reserve. When they increase the quantity of money and decrease interest rates in increases GDP (vice versa)

Question 13

Short Run Aggregate Supply

Answer 13

Wages and resource $ as PL increase

STICKY WAGES

Question 14

Long run Aggregate Supply

Answer 14

Wages and resource $ will increase as PL increase

FLEXIBLE WAGES

Question 15

Shifters of Aggregate supply

Answer 15

1) Changes in nominal wages
2) changes in commodity prices (change in input prices)
3) Change in productivity/technology
4) change in expectations about inflation
5) government actions NOT SPENDING (taxes on producers, subsidies for domestic producers, government regulation.

Question 16

Change in nominal wages meaning

Answer 16

If producers expect an increase in $ in the future, workers will demand higher wages and costs will increase
DECREASE SRAS

Question 17

Why is supply upward sloping?

Answer 17

If price rises workers want to make more.

Question 18

Recessionary gap (demand)

Answer 18

Inflation falls, unemployment rises

Question 19

Recessionary gap (supply)

Answer 19

STAGFLATION
inflation is rising
Unemployment is rising
VERY BAD

Question 20

Inflationary gap (demand)

Answer 20

Ex) 1920s
Inflation is rising
Unemployment falling

Question 21

Inflationary gap (supply)

Answer 21

Inflation is falling

Unemployment is falling

Question 22

How recessionary gap fixes itself on AD/AS model…

Answer 22

In the short run AD shifts 1st. Wages that stay the same means companies have to let workers go. Then SRAS moves as wages adjust (decrease). In the long run, the SRAS adjusts back to Yf and fixes itself.

Question 23

How an inflationary gap fixes itself on AD/AS model…

Answer 23

Short run: investments rise

Long run: wages adjust upwards causes SRAS to decrease and the employment returns back to Yf

Question 24

MPC

Answer 24

The portion we spend when we earn it

Change in consumption/change in disposable income

Question 25

MPS

Answer 25

The portion we save

Change in savings/change in disposable income

Question 26

Multiplier effect

Answer 26

Any increase in spending will result in even larger increase in GDP due to the fact that every $ is spent again multiple times.

1/MPS or 1/1-MPC

Question 27

Change in GDP or AD

Answer 27

Change in spending x multiplier

Question 28

Tax multiplier

Answer 28

Govt can use taxes to regulate fiscal policy
Raising taxes: negative
Cut taxes: positive

-MPC/MPS
MPC/MPS

Question 29

Balanced Budget Multiplier

Answer 29

Always 1

When govt spending increase are matched with equal decrease in taxes

Question 30

Stabilization Policy

Answer 30

The use of Govt policy to reduce the severity of a recession and rein in inflation

1) fiscal policy
2) monetary policy

Question 31

Non-Discretionary Fiscal Policy

Answer 31

Govt doesn’t choose it’s already done.
AKA: automatic stabilizers
ex) unemployment, welfare

Question 32

Discretionary Fiscal Policy

Answer 32

Govt chooses to spend

Question 33

Contractionary fiscal policy

Answer 33

THE BRAKE
laws that reduce inflation, decrease GDP (close inflationary gap)
Increase taxes, decrease gov spending

Question 34

Expansionary Fiscal Policy

Answer 34

THE GAS
Laws that reduce unemployment and increase GDP
Increase gov spending decrease taxes

Question 35

Problems of Govt spending

Answer 35

1) Deficit spending
2) Problens of timing
3) Politically motivated policies
4) Crowding out effect
5) Net export effect

Question 36

Budget deficit

Answer 36

When the gov expenditures exceeds its revenue

Question 37

Crowding out effect

Answer 37

When the gov borrows a ton of money.
“Crowds out” consumers and or investors
Govt spending must borrow so it increases AD-> Increase price for money (interest rate) -> interest rates rise so investment falls (decreased AD)

Question 38

Net export effect

Answer 38

International trade reduces the effectiveness of fiscal policies
Ex) Recessionary gap so gov spends to increase AD -> Increase in PL and interest rates -> US goods more expensive -> foreign countries buy less

Question 39

Monetary policy

Answer 39

Federal reserve

1) changing reserve requirements
2) changing the discount (interest) rates
3) purchasing and selling bonds

Question 40

Expansionary Policy

Answer 40

Policy that seeks to expand the money supply to encourage economic growth or combat recession
Monetary policy

Question 41

Contractionary Policy

Answer 41

Form of economic policy used to fight inflation which involves decreasing the $ supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation.