Unit 3 Flashcards

1
Q

Aggregate Demand

A

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

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2
Q

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

A

inverse

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3
Q

Aggregate demand equation

A

AD= C+I+G+Xn

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4
Q

3 things (effects) that cause AD to slope downward

A
  1. Wealth effect
  2. interest rate effect
  3. foreign trade effect
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5
Q

wealth effect

A

higher price levels reduces purchasing power and the quantity of expenditures

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6
Q

Interest rate effect

A

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

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7
Q

foreign trade effect

A

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

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8
Q

shifters of AD (4)

A
  1. Change in consumer spending
  2. changes in investment spending
  3. changes in govt. spending
  4. changes in net export spending
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8
Q

things that cause a change in consumer spending

A

higher incomes, consumer expectations, household debt

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9
Q

things that cause a change in investment spending

A

real interest rates, future business expectations, taxes

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10
Q

things that cause a change in govt. spending

A

govt. expenditures, increase in public works programs

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11
Q

things that cause a change in net exports

A

exchange rates, national income compared to abroad, recessions

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12
Q

multiplier effect

A

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

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13
Q

MPC

A

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

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14
Q

MPC formula

A

change in consumption/
change in disposable income

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15
Q

MPS

A

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

16
Q

MPS formula

A

change in savings/
change in disposable income

17
Q

Spending Multiplier Formula

A

1/ or 1/
MPS 1-MPC

18
Q

Total change in GDP formula

A

multiplier * initial change in spending

19
Q

simple tax multipier

A

1/
1-MPC

20
Q

What does aggregate supply do?

A

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

21
Q

Long Run AS

A

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

22
Q

Short Run AS

A

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

23
Q

Shifters of AS

A
  1. resources
  2. government action
  3. inflationary expectations
24
Q

Examples as to how resources changes AS (3)

A
  1. change in resource prices
  2. supply shocks
  3. inflationary expenses
25
Q

how does Govt. Action shift AS (3)

A
  1. Taxes on producers
  2. Subsidies
  3. Inflationary expectations
26
Q

how does productivity shift AS (1)

A
  1. technology