Econ - E202 - Exam 2

Front 1

The classical model assumes that wages and prices

Back 1

are always completely flexible

Front 2

What are flexible prices?

Back 2

Flexible prices adjust in the long run to shortages or surpluses.

Front 3

What accounts for the vertical slope of the LRAS curve? Why?

Back 3

Flexible prices.

Front 4

In the classical model, an increase in aggregate demand will result in (a(n)) ____________ in price level and (a(n)) _______________ output

Back 4

increased, no change

Front 5

In the classical model, equilibrium is where the AD curve intersects the ____ curve

Back 5

LRAS

Front 6

A decrease in income taxes shifts the AD curve ______

Back 6

right

Front 7

An increase in money in circulation shifts AD curve _____

Back 7

right

Front 8

A decrease in government spending shifts AD curve ________

Back 8

left

Front 9

A change in the AD curve in a system with the Keynesian short run AS curve will _______ real GDP and _______ the price level because

Back 9

increase, not change, because SRAS is horizontal in original keynesian model

Front 10

The original Keynesian economic theory states that many prices including wages would _______ when aggregate demand decreases

Back 10

not change

Front 11

If the AD2 curve intersects the SRAS curve above and to the right of intersection of AD1 with the LRAS curve, is unemployment higher at point A or point B
Why?

Back 11

point A

Front 12

In modern Keynesian analysis, an increase in AD results in ____________ in price level and ___________ in output

Back 12

an increase, an increase

Front 13

Tech change, expanded work force, greater productivity, more natural resources, etc... Shifts LRAS curve _____ and SRAS curve

Back 13

right, right

Front 14

Disasters that temporarily disrupt production shifts LRAS _____ and SRAS ______

Back 14

nowhere, to the left

Front 15

Assuming we import, what is the short term effect on our economy if there is a significant raw materials price inflation in other nations around the world

Back 15

shift SRAS to the left

Front 16

What is the effect on the economy of a shift of the SRAS to 'shock'?

Back 16

inflation (greater price level) and a lower real GDP

Front 17

A decrease in consumer confidence shifts the ____ curve _____

Back 17

AD, left

Front 18

A weaker dollar in foreign exchange markets shifts AD curve _____ and SRAS curve _________

Back 18

right, left

Front 19

What is the effect on the economy (output, price level) of the pictured scenario?

Back 19

price level increases (inflation), and real gdp may change or remain the same depending on the size of the curve shifts

Front 20

Potential GDP rises to 6 million because factors of production increase
Consumers become more pessimistic about the future so AD growth is not large
sharp increase in price of oil
What curves shift where?

Back 20

LRAS shifts right, SRAS shifts left (due to price increase of oil which is a determinate of SRAS), and AD curve shifts slightly right

Front 21

Three determinates of Aggregate Supply and which way they shift the curve

Back 21

resource quantity (increase shifts both SRAS and LRAS to the right)
resource quality (improvement shifts both SRAS and LRAS right)
resource price (increase shifts ONLY SRAS left)

Front 22

This represents (a/an) economic ______________ with ___________ inflation

Back 22

growth, no

Front 23

To have growth without inflation, what must be true of the AD SRAS and LRAS curves?

Back 23

They must all increase by the same amount

Front 24

The LRAS curve represents full employment, so points to the right of LRAS have _____ unemployment, and points to the left have ___________

Back 24

lower, higher

Front 25

inflation rate =

Back 25

price level current - price level base year / price level base year

Front 26

multiplier for government spending

Back 26

1 / (1 - MPC)

Front 27

Shift in real GDP from x change in gov spending

Back 27

(1/ 1- MPC) * x

Front 28

Given a consumption function and investment i, equilibrium is equal to...

Back 28

the intersection of y =x with the line c + i

Front 29

MPS =

Back 29

1 - MPC

Front 30

Questions to go over:

Back 30

quiz 6 - 4
quiz 6 - 7
quiz 7 - 10 budget deficit/surplus
quiz 8 - 11

Front 31

What is the consumption equation? *

Back 31

C = m + mpc*Y

m = autonomous spending
mpc is slope of C
Y is disposable or national income

Front 32

multiplier = n
no taxes paid by household
GDP = Y
C = 12
real autonomous consumption = ?

Back 32

(Y - C) / n

Front 33

If price level is not fixed and economy is operating above full employment, increase in gov spending Q with multiplier n shifts AD curve _____________

Back 33

rightwards less than n * Q

Front 34

Y =

Back 34

C + I + G + X

Front 35

if real GDP is > than equilibrium GDP, there will be an unplanned _______ in inventories, and real GDP will _____ next period

Back 35

increase, decrease

Front 36

APC =
APS =

Back 36

C / Y
1 - C/Y

Front 37

break even income/consumption point is at

Back 37

intersection of C = Y and C

Front 38

if there are no taxes, Y is

Back 38

disposable income

Front 39

national savings =

Back 39

Y - C - G = I

Front 40

DI =

Back 40

Y - T + TP

Front 41

If interest rates increase, planned investment ___________

Back 41

decreases

Front 42

Higher taxes on business shifts investment to the __________

Back 42

left

Front 43

savings =

Back 43

-a + MPS(Y) (no taxes)

a = autonomous consumption

Front 44

Three examples of loanable funds

Back 44

Bonds
bank certificates of deposit
mutual fund shares

Front 45

Real estate is a loanable fund T/F

Back 45

F

Front 46

Why do households supply loanable funds

Back 46

interest income received from the borrowers

Front 47

In terms of saving and investment, equilibrium GDP is where

Back 47

I = S = -a + MPS(Y)
planned savings/investment are equal

Front 48

investment - saving equality

Back 48

S = Y - C - G

Front 49

In the market for loanable funds, an increase in business taxes shifts demand ____ and suppyl ______, causing a _______ in equilibrium interest rate and a ____________ in the equilibrium quantity of loanable funds

Back 49

left, nowhere
decrease
decrease

Front 50

increase in business taxes means quantity of investment ________ and future capital stock ________________

Back 50

decreases decreases

Front 51

in the market for loanable funds budget surpluses shift the _____________ curve ___________

Back 51

supply right

Front 52

in the market for loanable funds a budget surplus __________ equilibrium interest rate and ___________ the equilibrium quantity of loanable funds

Back 52

decreases, increases

Front 53

budget surplus causes savings and investment to _____________ and ____________ respectively

Back 53

increase and increase
shift supply curve down demand curve

Front 54

indirect finance
example?

Back 54

Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.
banks!

Front 55

direct finance
example

Back 55

flow of funds from savers to firms through financial markets
new york stock exchange

Front 56

stock -
bond -

Back 56

-financial security that represents partial ownership of a firm
-financial security that represents a promise to repay fixed amount of funds

Front 57

in loanable funds market budget deficit shifts supply _______ and demand _______
This causes real interest rate to __________ and the equilibrium quantity of loanable funds to ____

Back 57

left, nowhere
increase, decrease

Front 58

budget deficit causes savings and investment to __________ respectively

Back 58

decrease

Front 59

private savings =

Back 59

y - t - c + TR

Front 60

public savings

Back 60

t - g - TR

Front 61

total savings =

Back 61

PrS+PubS = y - g - c

Front 62

current value of x dollars in n years at i interest rate

Back 62

x / (1 + i)^n

Front 63

a decrease in price of a firm's bonds indicates what?

Back 63

cost of external funds has increased

Front 64

a decrease in price of stocks would indicate that

Back 64

investors expect firm to have lower profits in the future

Front 65

a decrease in loanable funds means quantity of savings __________ and investment _________

Back 65

decreases, decreases

Front 66

present value =

Back 66

sum of future value/ (1 + i)^n

ex. 80/1.15 + 80/1.15^2 + 1000/1.15^2

Front 67

discretionary fiscal policy

Back 67

Discretionary fiscal policy is The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability and economic growth.

Front 68

automatic stabalizers

Back 68

Structural features of government spending and taxation that reduce fluctuations in disposable income and thus consumption over the business cycle.

Front 69

recessionary gap is

Back 69

equilibrium gdp is less than potential (inflationary is versa)

Front 70

laffer curve

Back 70

Front 71

discretionary fiscal policy is most effective during normal economic times or times of great economic stress
why?

Back 71

due to lags and uncertainty created by tax changes it is not effective during normal economic times, and is more useful in extreme cases, such as wartime

Front 72

aggregate expenditure is the same as

Back 72

national income
c + I + G + X

Front 73

aggregate expenditure shifts ____ by __________ after a tax increase of T with mpc

Back 73

down, mpc(T)

Front 74

Crowding out is when

Back 74

increases in government spending cause interest rates to rise reducing investment and consumption

Front 75

effect time lag

Back 75

time that lapses between implementation of a policy and the result of the policy

Front 76

ricardian equivalence theorem

Back 76

An economic theory that suggests that when a government tries to stimulate demand by increasing debt-financed government spending, demand remains unchanged. This is because the public will save its excess money in order to pay for future tax increases that will be initiated to pay off the debt. This theory was developed by David Ricardo in the nineteenth century, but Harvard professor Robert Barro would implement Ricardo's ideas into more elaborate versions of the same concept.

Front 77

direct expenditure offset :

Back 77

private sector doesn't buy things they would have in the absence of the gov expenditure

Front 78

indirect crowding out: *

Back 78

Increase in autonomous expenditure → IS curve shifts outwards → rise in income → rise in transactions demand for cash → raise interest rate → fall in investment

Front 79

money illusion

Back 79

tendency to think in nominal not in real terms

Front 80

say's law

Back 80

An economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services.
"supply creates its own demand"

Front 81

classical model assumptions:

Back 81

market is a self-correcting mechanism

Front 82

according to keynesian economists equilibrium real gdp is ________ determined

Back 82

demand

Front 83

problem 29

Back 83

see the solutions for that one about crowding out

Front 84

determinates of aggregate supply

Back 84

Supply Shocks - Supply shocks are sudden surprise events that increase or decrease output on a temporary basis. Examples include unusually bad or good weather or the impact from surprise military actions.

Resource Price Changes - These, too, can alter SAS. Unless the price changes reflect differences in long-term supply, the LAS is not affected.

Changes in Expectations for Inflation - If suppliers expect goods to sell at much higher prices in the future, their willingness to sell in the current time period will be reduced and the SAS will shift to the left.

Front 85

determinates of aggregate demand

Back 85

Real Interest Rate Changes - Such changes will impact capital goods decisions made by individual consumers and by businesses. Lower real interest rates will lower the costs of major products such as cars, large appliances and houses; they will increase business capital project spending because long-term costs of investment projects are reduced. The aggregate demand curve will shift down and to the right. Higher real interest rates will make capital goods relatively more expensive and cause the aggregate demand curve to shift up and to the left.

Front 86

determinates of aggregate demand

Back 86

Changes in Expectations - If businesses and households are more optimistic about the future of the economy, they are more likely to buy large items and make new investments; this will increase aggregate demand.

The Wealth Effect - If real household wealth increases (decreases), then aggregate demand will increase (decrease)

Changes in Income of Foreigners - If the income of foreigners increases (decreases), then aggregate demand for domestically-produced goods and services should increase (decrease).

Front 87

determinates of aggregate demand

Back 87

Changes in Currency Exchange Rates - From the viewpoint of the U.S., if the value of the U.S. dollar falls (rises), foreign goods will become more (less) expensive, while goods produced in the U.S. will become cheaper (more expensive) to foreigners. The net result will be an increase (decrease) in aggregate demand.

Inflation Expectation Changes - If consumers expect inflation to go up in the future, they will tend to buy now causing aggregate demand to increase. If consumers' expectations shift so that they expect prices to decline in the future, t aggregate demand will decline and the aggregate demand curve will shift up and to the left.

Front 88

an increase in DI leads to a ______ in APS

Back 88

increase

C/Y = APC, if disposable income increases Y increase making APC smaller. 1 - APC = APS and if APC is smaller APS is larger

Front 89

What changes autonomous consumption

Back 89

interest rate
wealth
expectations concerning economic conditions

Front 90

with a lack of internal funds a company would do what (hint: bonds)

Back 90

demand loanable funds by selling bonds

Front 91

values of homes rise meaning interest rate

Back 91

shifts supply of loanable funds right meaning greater investment lower interest rates

Front 92

expectation of greater interest rates shifts demand and supply curves in loanable funds market

Back 92

right and left respectively

Front 93

optimism about economic conditions causes an

Back 93

increase in investment and interest rate
(shifts aggregate demand curve in loanable funds market right)

Front 94

If a tax cut is enacted, and ricardian equivalence holds true savings will

Back 94

increase exactly by amount of tax cut