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AP Macro > Unit 4 > Flashcards

Unit 4 Flashcards

1
Q

What is the interest rate effect?

A

Effects experienced in macroeconomic indicators caused by an alteration in the interest rates

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2
Q

What is MPC? How do you calculate it?

A

An MPC is an increase in consumer spending when disposable income rises by $1
- Marginal Propensity to Consume

MPC = change in consumer spending/change in disposable income

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3
Q

What is MPS? How do you calculate it?

A

An MPS is an increase in household savings when disposable income rises by $1
- Marginal Propensity to Save

MPS = 1-MPC

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4
Q

What is the spending multiplier? How do you calculate it?

A

The ratio of the total change in Real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change (AAS)

Change Y = 1/(1-MPC) x Change AAS -> (spending multiplier) Change in Y/Change in AAS = 1/(1-MPC)

  • INCLUDE THIS ON CHEAT SHEET
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5
Q

What is a consumption function?

A

An equation or graph that shows how a household’s consumer spending varies with its current disposable income

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6
Q

What is the AD-AS model used for?

A

It’s used to analyze economic fluctuations

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7
Q

When is the economy in short-run macroeconomic equilibrium?

A

When the quantity of agg. output supplied is equal to the quantity demanded
- When the SRAS and AD lines cross

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8
Q

When is the economy in long-run macroeconomic equilibrium?

A

When the point of short-run macroeconomics equilibrium is on the long-run agg. supply curve

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9
Q

When does a Recessionary Gap happen? How can they be addressed?

A

When agg. output is BELOW the potential output
- expansionary fiscal policy
- LRAS is to the RIGHT of SRAS and AD intersection

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10
Q

When does an Inflationary Gap happen? How can they be addressed?

A

When agg. output is ABOVE potential output
- contractionary fiscal policy
- LRAS is to the LEFT of SRAS and AS intersection

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11
Q

What is self-correcting?

A

When shocks to agg. demand affect agg. output in the short-run, but NOT the long-run

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12
Q

What is Potential Output?

A

Is the level of Real GDP the economy would produce if all prices, including nom. ages, were fully flexible

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13
Q

What is the Wealth Effect?

A

A change in consumer spending caused by the altered purchasing power of consumers assets

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14
Q

What is the SRAS? What does it show?

A

The SRAS is the short-run aggregate supply curve
- a positive relationship between agg. price level and Real GDP

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15
Q

What is the LRAS? What does it show?

A

The LRAS is the long-run aggregate supply curve.
- the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible
- regardless of price, this is the potential/max

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16
Q

What is the Stabilization Policy?

A

The use of gov. policy to reduce the severity of recessions & rein in excessively strong expansions (spending money)
- meant to reduce the impact of inflationary and recessionary gaps (NOT eliminate them)

17
Q

What does Expansionary Fiscal Policy do? How?

A

Increases agg. demand by:
- increasing gov. purchases of g+s
- cutting taxes
- increasing gov. transfers

18
Q

What does Contradictory Fiscal Policy do? How?

A

Decreases agg. demand by:
- reducing gov. purchases of g+s
- increasing taxes
- decreasing gov. transfers

19
Q

What are the shifters of Agg. Demand (AD)?

A

SPEW
S: ize of physical capital (stock)
P: olicy
E: xpectations
W: ealth

20
Q

What are the shifters of Agg. Supply (AS)?

A

PEAR
P: roductivity
E: xpectations ABOUT INFLATION
A: ctions by the gov.
R: esources prices

21
Q

What does AD show?

A

The relationship between overall consumption & price level

22
Q

What does AS show?

A

The relationship between economy-wide production & the agg. price level

23
Q

What is Fiscal Policy?

A

The use of EITHER gov. spending OR tax policy to stabilize the economy

24
Q

What is Monetary Policy?

A

Fed. reserve controls monetary policy
- the $$$ in circulation

25
Q

How do I find the Final Change in Real GDP? When do I use this equation?

A

Autonomous change in aggregate spending x multiplier = final change in Real GDP
- Equation is used after finding the multiplier

26
Q

How do I find Real GDP after the change? When do I use this equation?

A

Current GDP + final change in Real GDP = Real GDP after the change
- Equation is used after finding the final change in Real GDP

27
Q

What is the Tax Multiplier? How do I calculate it?

A

Factor by which a change in tax collections changes Real GDP
-MPC/(1-MPC)

28
Q

What is an Automatic Stabilizer?

A

Gov. spending (& taxation) rules that cause F. Policy to be automatically expansionary when the economy contracts
- contractionary when the economy expands

29
Q

What is the Balanced Budget Multiplier? What does it equal?

A

The factor by which a change in both spending & taxes changes Real GDP
- EQUALS 1

30
Q

What is Discretionary Fiscal Policy?

A

F. Policy that is the result of deliberate actions by policy makers rather than rules

31
Q

What does the Consumer Confidence Index do?

A

Indicates future developments in households’ consumption and saving

32
Q

Why does the Agg. Demand Slope downward?

A

The Wealth Effect (consumption) and the Interest Rate Effect (investment)

33
Q

What is Stagflation?

A

Inflation increases, aggregate output (GDP) decreases

34
Q

How do I calculate the size of output gaps?

A

(Actual GDP-Potential GDP)/Potential GDP = X
X x 100 = Size of Output gap%

  • MAYBE PUT ON CHEAT SHEET
35
Q

What shifts the LRAS?

A

Subsidies, productivity, input prices, taxes, and expectations

36
Q

What shifts the SRAS?

A

Labor, capital, and technology

37
Q

What fiscal policy can be used to combat inflation? What is its goal?

A

Contractionary monetary policy is a popular method of controlling inflation.
- Contractionary policy’s goal is to reduce the money supply within an economy by increasing interest rates

38
Q

What is Autonomous Change?

A

A change in autonomous expenditures that sets in motion a change in the national income and GDP through the multiplier

AP Macro (3 decks)

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