Unit 3

Question 1

Aggregate demand

Answer 1

an economic measurement of the total sum of all final goods and services produced in an economy

Question 2

Real wealth effect

Answer 2

when a change in the price level leads to a change in consumer spending; this happens because assets have more or less purchasing power

Question 3

Interest wealth effect

Answer 3

a rise in real wealth increases consumption, shifting the IS curve out to the right, thus pushing up interest rates and increasing aggregate demand

Question 4

Exchange rate effect

Answer 4

a positive shock to the exchange rate of the domestic currency (an unexpected appreciation) will make exports more expensive and imports less expensive

Question 5

Expenditure multiplier

Answer 5

multiplier shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy

Question 6

Tax multiplier

Answer 6

a component of a retrospective rating plan that represents the costs associated with taxes, assessments, and other fees that the insurer must pay to the states on premiums written and collected

Question 7

Marginal propensity to consume

Answer 7

the marginal propensity to consume is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending occurs with an increase in disposable income

Question 8

Marginal propensity to save

Answer 8

save is the fraction of an increase in income that is not spent and instead used for saving. It is the slope of the line plotting saving against income

Question 9

Short run aggregate supply

Answer 9

lets us capture how all of the firms in an economy respond to price stickiness. When prices are sticky, the SRAS curve will slope upward

Question 10

Recessionary gap

Answer 10

a situation wherein the real GDP is lower than the potential GDP at the full employment level. The economy operates below the full employment level in a recessionary gap

Question 11

Inflationary gap

Answer 11

measures the difference between the current level of real gross domestic product (GDP) and the GDP that would exist if an economy was operating at full employment

Question 12

Positive vs negative supply shocks

Answer 12

A positive supply shock increases output causing prices to decrease, while a negative supply shock decreases output causing prices to increase

Question 13

cost-push and demand-pull inflation

Answer 13

short, cost-push inflation is driven by supply costs while demand-pull inflation is driven by consumer demand—while both lead to higher prices passed onto consumers

Question 14

Fiscal policy

Answer 14

fiscal policy is the use of government revenue collection and expenditure to influence a country’s economy

Question 15

Automatic stabilizers

Answer 15

corporate and personal income taxes that are progressively graduated, which means that they are fixed in proportion to the income levels of the taxpayer

Question 16

Government transfers

Answer 16

a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return

Question 17

Expansionary vs contractionary policy

Answer 17

Contractionary fiscal policy is when the government taxes more than it spends. Expansionary fiscal policy is when the government spends more than it taxes

Question 18

Stagflation

Answer 18

the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices

Question 19

Long run aggregate supply

Answer 19

a curve that shows the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible