Unit 3

Question 1

Aggregate Demand

Answer 1

All goods/services (real GDP) that buyers are willing/able to purchase at different prices

Question 2

What is the relationship between price level and real GDP (direct or inverse?)

Answer 2

inverse

Question 3

Aggregate demand equation

Answer 3

AD= C+I+G+Xn

Question 4

3 things (effects) that cause AD to slope downward

Answer 4

1. Wealth effect
2. interest rate effect
3. foreign trade effect

Question 5

wealth effect

Answer 5

higher price levels reduces purchasing power and the quantity of expenditures

Question 6

Interest rate effect

Answer 6

when price levels increase, lenders charge higher interest rates to get a real return on loans

Question 7

foreign trade effect

Answer 7

when US Prices rise, foreign buyers purchase less US goods, and Americans buy more foreign goods

Question 8

shifters of AD (4)

Answer 8

1. Change in consumer spending
2. changes in investment spending
3. changes in govt. spending
4. changes in net export spending

Question 8

things that cause a change in consumer spending

Answer 8

higher incomes, consumer expectations, household debt

Question 9

things that cause a change in investment spending

Answer 9

real interest rates, future business expectations, taxes

Question 10

things that cause a change in govt. spending

Answer 10

govt. expenditures, increase in public works programs

Question 11

things that cause a change in net exports

Answer 11

exchange rates, national income compared to abroad, recessions

Question 12

multiplier effect

Answer 12

shows how spending is magnified in the economy (velocity of money)

Question 13

MPC

Answer 13

amount people consume rather than save when a change occurs in disposable income

Question 14

MPC formula

Answer 14

change in consumption/
change in disposable income

Question 15

MPS

Answer 15

amount people save rather than consume when a change occurs in disposable income

Question 16

MPS formula

Answer 16

change in savings/
change in disposable income

Question 17

Spending Multiplier Formula

Answer 17

1/ or 1/
MPS 1-MPC

Question 18

Total change in GDP formula

Answer 18

multiplier * initial change in spending

Question 19

simple tax multipier

Answer 19

1/
1-MPC

Question 20

What does aggregate supply do?

Answer 20

It differentiates between short and long run. It has 2 curves

Question 21

Long Run AS

Answer 21

Wages/resources are flexible. It changes as price levels change

Question 22

Short Run AS

Answer 22

wages/resources prices are sticky. It does not change as price levels change

Question 23

Shifters of AS

Answer 23

1. resources
2. government action
3. inflationary expectations

Question 24

Examples as to how resources changes AS (3)

Answer 24

1. change in resource prices 2. supply shocks 3. inflationary expenses

Question 25

how does Govt. Action shift AS (3)

Answer 25

1. Taxes on producers 2. Subsidies 3. Inflationary expectations

Question 26

how does productivity shift AS (1)

Answer 26

1. technology