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280 Cards in this Set

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What is Microeconomics?
the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
What is Macroeconomics
the study of the economy as a whole, including topics asuch as inflation, unemployment, and economic growth.
What is a business cycle?
alternating periods of economic expansion and economic recession
What is expansion?
the period of a business cycle during which total production and total employment are decreasing
What is economic growth?
the ability of an economy to produce increasing quantities of goods and services
What is an inflation rate?
the percentage increase in the price level from one year to the next
What is a final good or service?
a good or service purchased by a final user
What is an intermediate good or service?
a good or service that is an input into another good or service (ex: tire on truck)
What is a transfer payment?
payments by the government to households for which the government does not receive a new good or service in return
What is consumption?
spending by households on goods and services, not including spending on new houses
What is investment?
spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses
What are government purchases?
spending by federal, state, and local governments on goods and services
What are net exports?
exports –imports
What is value added?
the market value a firm adds to a product
What is an underground economy?
buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
What is nominal GDP?
the value of final goods and services evaluated at current-year prices
What is Real GDP?
the value of final goods and services evaluated at base-year prices
GDP is the market value of all _____ goods and services produced in the country during a period of time, typically one year.
Final
GDP is measured using ______ ______, not quantities
market values
GDP includes only the market value of which kind of goods because otherwise the product would be “double counted”?
Final Goods
True/False: GDP includes only current year production
True
When you buy a product, your money becomes someone's ______
income
What three groups do firms sell goods to?
-domestic households
-foreign firms and households,
-government
What are the four factors of production?
-labor
-capital
-natural resources
-entrepreneurship
What are the four categories of income?
-wages
-interest
-rent
-profit
True/False: Transfer Payments are included in GDP
False
What are the four components of GDP
-Personal Consumption Expenditures or “Consumption”
-Gross Private Domestic Investment, or “Investment”
-Government Consumption and Gross Investment, or “Government Purchases”
-Net Exports of Goods and Services, or “Net Exports”=Exports-Imports
What is the equation for GDP
GDP=C+I+G+NX
What are the shortcomings in GDP as a measure of total production?
GDP Does NOT count:
-Household Production
-The Underground Economy
What are the shortcomings of GDP as a measure of well-being?
GDP does not count:
-value of leisure
-GDP is not adjusted for pollution of other negative effects of production
-GDP is NOT adjusted for changes in crime and other social problems
How is Nominal GDP calculated?
Nominal GDP is calculated by summing the current values of final goods and services
How is real GDP calculated?
Real GDP is calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years
What is the equation for the GDP deflator
The GDP deflator= (Nominal GDP/Real GDP) x 100
What is a price level?
A measure of the average price of goods and services in the economy?
What does the GDP deflator measure?
Price level
What is Gross National Product?
the value of final goods and services produced by residents of the US even if production takes place outside US
How is National Income calculated?
GDP-depreciation
How is disposable income calculated?
Disposable Income=personal income-personal tax payments
What is the labor force?
the sum of employed and unemployed workers in the economy
What si the unemployment rate?
the percentage of labor force that is unemployed
Who are discouraged workers?
people who are available for work but have not looked for a job during the previous 4 weeks because they believe no jobs are available for them
What is the labor force participation rate?
the percentage of the working-age population in the labor force
What is frictional unemployment?
short-term unemployment that arises from the process of matching workers with jobs
What is structural unemployment?
unemployment that arises from a persistent mismatch between the skills and the attributes of workers and the requirements of jobs
What is cyclical unemployment?
unemployment caused by a business cycle recession
What is the Natural Rate of unemployment?
the normal rate of unemployment, consisting of frictional unemployment plus structural unemployment
What are unemployment insurance payments?
payments given to unemployed generally equal to about half of the average wage
What are social insurance programs?
allow unemployed adults to receive some government payments even after their eligibility for unemployment insurance has ended
What is the Producer Price Index?
an average of the prices received by producers of goods and services at all stages of the production process
What is the nominal interest rate?
the stated interest rate on a loan
What is the real interest rate?
the nominal interest rate minus the inflation rate
What are Menu Costs?
the costs to firms of changing prices
What is the formula for the unemployment rate?
Unemployment rate= (number of employed/labor force) x 100
What is the formula for the labor force participation rate?
Labor force participation rate= (labor force/working-age-population) x 100
What is the formula for the employment-population ratio?
Employment-population ratio= (employment/working-age population) x 100
What are the four types of unemployment?
-frictional unemployment
-structural unemployment
-cyclical unemployment
-seasonal unemployment
How do you calculate the consumer price index?
CPI= (expenditures in the current year/expenditures in the base year) x 100
What are the four biases that cause changes in the CPI to overstate the true inflation rate?
-substitution bias
-increase in quality bias
-new product bias
-outlet bias
What is the Consumer Price Index?
THe average prices of the goods and services purchased by an urban family of four
What is the production price index?
An average of the prices received by producers of goods and services at all stages of the production process
What is the formula for the Consumer Price Index?
(expenditures in the current year/expenditures in the base year) x 100
PPI includes the prices of which goods?
Final and Intermediate
How do you calculate the real interest rate?
Nominal interest rate-Inflation rate
What does inflation become dangerous?
only becomes dangerous when it is unanticipated and people are not prepared
What is the business cycle?
alternating periods of economic expansion and economic recession
What is Long Run Economic Growth?
the process by which rising productivity increases the average standard of living
What is Labor Productivity
the quantity of goods and services that can be produced by one worker or by one hour of work
What is capital?
manufactured goods that are used to produce other goods and services
What is Potential GDP?
the level of real GDP attained when all firms are producing at capacity
What is a financial system?
the system of financial markets and financial intermediaries through which firms acquire funds from households
What are financial markets?
markets where financial securities, such as stocks and bonds, are bought and sold
What are financial intermediaries?
firms, such as banks, mutual funds, pension funds, and insurance companies that borrow funds, and insure companies that borrow funds from savers and lend them to borrowers
What is the market for loanable funds?
the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
What is crowding out?
a decline in private expenditures as a result of an increase in government purchases
What are Durables?
goods that are expected to last for 3 or more years
What are Nondurables?
goods that are expected to last for fewer than 3 years
What is long run economic growth?
the best measure of the standard of living is real GDP per person (real GDP per capita)
What is the connection between economic prosperity and health?
as people become taller, stronger and less susceptible to disease, they become more productive
-reducing disease and increasing nutrition=economic growth
What is the rule of 70 and what does it find?
Number of years to double GDP=70/growth rate
increases in real GDP per capita depend on what?
labor productvity
as capital stock per hour increases, worker productivity _________
increases
What is human capital?
human capital refers to the accumulated knowledge and skills workers acquire from education and training or from their life experiences
What is technological change?
technology refers to the processes a firm uses to turn inputs
Why are entrepreneurs important to the economy?
-they decide whether to allocate a firm’s resources to research and development that can result in new technologies
What are retained earnings?
profits that are reinvested in the firm rather than paid to the firm’s owners
When is economic growth impossible?
without a well-functioning financial system, economic system, economic growth is impossible because firms will be unable to expand and adopt new technologies
What is financial security?
document that states the terms under which funds pass from the buyer of the security-who is providing funds-to the seller
What are stocks?
financial securities that represent partial ownership of a firm
What are bonds?
are financial securities that represent promises to repay a fixed amount of funds
What are mutual funds?
sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages, and other financial securities
What three services points the financial system provide for savers and borrowers? Explain them
risk sharing; the chance that the value of the financial security will change relative to what you expect
-liquidity: the ease with which a financial security can be exchanged for money
-information: facts about borrowers and expectations about returns on financial securities
What is national income accounting?
national income accounting refers to the methods the Bureau of Economic Analysis uses to keep track of total production and total income in the economy
What is an open economy?
there is interaction with other economies in terms of both trading of goods and services and borrowing and lending
What is a closed economy?
there is no trading or borrowing and lending with other economies
-net exports are zero so Y=C+I+G
What is private saving?
private saving: equal to what households retain of their income after purchasing goods and services
S-private=Y+TR-C-T
What is the equation for private saving?
S-private=Y+TR-C-T
What is public saving the amount of
equals the amount of tax revenue the government retains after paying for government purchases and making transfer payments
What is the equation for public saving?
S-public=T-G-TR
What is the equation for total saving in the economy?
Sprivate+Spublic
OR
S=Y-C-G
Total saving of funds must be equal to the _________
Investment
How is the supply of loanable funds determined?
the supply of loanable funds is determined by the willingness of households to save by the extent of government saving or dissaving.
What does equilibrium in the market for loanable funds determine?
equilibrium in the market for loanable funds determines the quantity of loanable funds that will flow from lenders to borrowers each period
What is income tax?
households pay taxes on all income earned
What is consumption tax?
households pay taxes on only the income they spend
What is the inflation rate?
percentage increase in the price level from one year to the next
during economic expansions, inflation rate usually _________, particularly near the end of the expansion
increases
When did significant economic growth begin?
The industrial Revolution
What was the industrial revolution?
The application of mechanical power to the production of goods, beginning in England around 1750
What created long-run economic growth for the countries that were a part of the Industrial Revolution?
The use of mechanical power to create goods created long-run economic growth for the countries that were a part of the Industrial Revolution
What is long run economic growth?
Sustained increases in GDP per capita
What is compounding interest?
Applying interest rates to funds over time
Why do growth rates matter?
Growth rates matter because an economy that grows too slowly fails to raise living standards
How do you calculate the growth rate over a period of time?
(Current GDP-Past GDP)/Past GDP *100
What are the two groups of the world's economies?
High-income or industrial countries
W. Europe, Australia, Canada, Japan, New Zealand, and the USA
Poorer or developing countries
Africa, Asia, and Latin America
What is the third, newer group of the world's economies?
Newly Industrializing countries
Singapore, South Korea, Taiwan all had high growth rates in the 90’s and can be considered to be newly industrialized
What is the economic growth model?
A model that explains growth rates in real GDP per capita over the long run
What is labor productivity?
The quantity of goods and services that can be produced by one worker or by the hour of work
What two key factors determine labor productivity?
The quantity of capital per hour worked
The level of technology
What is technological change?
A change in the quantity of output a firm can produce using a given quantity of inputs
What are the three main sources of technological change?
Better Machinery and Equipment
Increases in human capital
Better means of organizing and managing production
What are the two kinds of capital?
Physical and Human
What is Physical Capital?
Computers, factory buildings, machine tools, warehouses, and trucks. The more physical capital is had, the more output that can be produced
What is Human Capital?
The accumulated knowledge and skills that workers acquire from education and training or from their life experiences
Technological change is ___ the same thing as more physical capital
NOT
True/False: Adding more capital that is the same as existing capital is technological change
FALSE
What do we look at when analyzing economic growth?
When analyzing economic growth, we look at increases in real GDP per hour worked and increases in capital per hour worked
What is the per-worker production function?
The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant
Increases in the quantity of capital per hour worked results in what?
movements up the per-worker production function
When holding technology constant, equal increases in the amount of capital per hour worked lead to what?
diminishing increases in output per hour worked
What is the law of diminishing returns?
As more value of an input is added, the fixed quantity of another output increases by smaller additional amounts
Which is more important for Economic Growth: More Capital or Technological Change?
Technological change helps economies avoid diminishing returns to capital.
What is an example of technological change?
replacing existing capital with more productive capital is an example of technology change
What are the three reasons Technological Change is the key to sustaining economic growth?
Shifts along the per-worker production function

Allows an economy to produce more real GDP per hour worked with the same quantity of Capital per hour worked

In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change
According to the current economic growth model, ____________ ______ is the key factor in explaining long-run growth in real GDP per capita
According to this model, productivity growth is the key factor in explaining long-run growth in real GDP per capita
What is the New Growth Theory
A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system
Knowledge capital at the firm level is also subject to which law?
Knowledge capital at the firm level is also subject to the law of diminishing returns
At the level of the entire economy, knowledge capital is subject to __________ _______
At the level of the entire economy, knowledge capital is subject to increasing returns
Physical capital is _____ and is __________ because once it is used, it cannot be used again and is kept from use by other firms
Physical capital is rival and is excludable because once it is used, it cannot be used again and is kept from use by other firms
What are the three ways Government policy can help increase the accumulation of knowledge capital
Protecting intellectual property with patents and copyrights

Subsidizing research and development

Subsidizing education
New products unleash what, that drives older products and often the firms that produced them out of the market
New products unleash a “gale of creative destruction” that drives older products and often the firms that produced them out of the market
The __________ is central to economic growth
Entrepreneur
The profits entrepreneurs hope to earn provide incentive for bringing together the factors of production -- labor, capital, and natural resources -- to do what?
The profits entrepreneurs hope to earn provide incentive for bringing together the factors of production -- labor, capital, and natural resources -- to start new firms and introduce new goods and services.
The economic growth model provides a good blueprint for developing countries to become rich, what are the two key points on this blueprint?
Increase the quantity of capital per hour worked
Use the best available technology
The economic growth model predicts that ____ countries will grow faster than ____ countries
Poor, Rich
Why Haven’t Most Western European Countries, Canada, and Japan Caught Up to the US?
High-income countries have actually fallen further behind the US since 1990
What are the two reasons for high-income countries actually falling further behind the US since 1990?
Greater Flexibility of US Labor markets
Greater efficiency of the US financial system
What are the Four key factors that poor countries did not rapidly grow over the past 50 years?
Failure to enforce the rule of law
Wars and Revolutions
Poor public education and health
Low rates of saving and investment
One way for a developing country to break out of the cycle of low saving and investment and low growth is through _______ __________
Foreign Investment
What is foreign direct investment?
The Purchase or building by a corporation of a facility in a foreign country
What is Foreign Portfolio Investment?
The purchase by an individual or a firm of stocks or bonds issued in another country
What is globalization?
The process of countries becoming more open to foreign trade and investment
How is globalization measured?
Measured by the fraction of a country’s GDP accounted for by exports
How did globalization benefit developing countries?
Benefited developing countries by making it easier for them to get investment funds and technology
What are the four growth policies?
Enhancing property rights and the rule of law
Improving health and education
Promoting technological change
Promoting saving and investment
What is Aggregate Expenditure?
Total spending in the economy
What is GDP?
The value of all the final goods and services produced in an economy during a particular year
What is Real GDP?
Corrects nominal GDP for the effects of inflation
What is the Aggregate Expenditure Model?
A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant
In any particular year, the level of GDP is determined mainly by the level of _________ __________
In any particular year, the level of GDP is determined mainly by the level of aggregate expenditure
What are John Maynard Keynes' four identified components of aggregate expenditure that together equal GDP
Consumption, Planned Investment, Government Purchases, Net Exports
What are inventories?
Goods that have been produced but not yet sold
Actual investment spending will be greater than planned investment spending when there in an unplanned ________ in inventories
increase
Actual investment will equal planned investment only when?
there is no unplanned change in inventories
Macroeconomic equilibrium is when?
total spending equals total production, AE = GDP
When aggregate expenditure is greater than the GDP, inventories will _______, and GDP and total employment will ________
Decline, Increase
When aggregate expenditure is less than GDP, inventories will ________, and GDP and total employment will ________
increase, decrease
If economists forecast that aggregate expenditure will decline in the future, that is equivalent to what?
If economists forecast that aggregate expenditure will decline in the future, that is equivalent to forecasting that GDP will decline and the economy will enter a recession
When a decline in aggregate expenditure is forecasted, governments may implement what to head off the recession?
Macroeconomic policies
What are the five most important variables that determine the level of consumption?
Current Disposable income
Household Wealth
Expected Future Income
The Price Level
The Interest Rate
What is current disposable income?
The income remaining to households after they have paid their personal income tax and received government transfer payments, such as Social Security
What is macroeconomic consumption?
Macroeconomic consumption is the total of all the consumption of US households
Only when does total income decline?
Only during recessions does total income decline
What is household wealth?
A household’s wealth is the value of its assets minus the value of its liabilities
What are the three categories of spending?
Services
Nondurable Goods
Durable Goods
What are non durable goods?
Goods such as food and clothing
What are durable goods?
goods such as automobiles and furniture
Which goods are more likely to be affected by changes in the interest rate and why?
Durable goods are most likely to be affected by changes in the interest rate because a high real interest rate increases the cost of spending financed by borrowing
Consumption is a ________ of disposable income?
function
How do you calculate the slope of the consumption function?
change in consumption/change in disposable income
What is the slope of the consumption function referred to as?
Referred to as Marginal Propensity to Consume (MPC)
What is the Marginal Propensity to Consume (MPC)?
Used to measure how much consumption spending changes when disposable income changes
What is the formula for the change in consumption?
Change in consumption = Change in disposable income * MPC
What is the formula for disposable income?
Disposable Income = National Income – Net Taxes
How are Net Taxes calculated?
Taxes minus government transfer payments are referred to as net taxes
What is the difference between GDP and national income?
None
National income and disposable income differ by a ________ amount
Constant
What is the formula for calculating national income?
National Income = Consumption + Saving + Taxes
Y = C+S+T
What is the Marginal Propensity to save? What is its formula?
The amount by which saving changes when disposable income changes

Change in saving / change in disposable income
When taxes are constant, the marginal propensity to consume plus the marginal propensity to save must always equal what?
1
What are the four most important variables that determine the level of investment?
Expectation of Future Probability
Interest Rate
Taxes
Cash Flow
What are government purchases?
Total spending by the government in which the government receives a good or service in return
How are Net Exports calculated?
Calculated by taking the value of spending by foreign firms and households on goods and services produced in the US and subtracting the value of spending by US firms and households on goods and services produced in other countries
Net exports usually ________ when the US economy is in a recession
increase
What are the three most important variables that determine the level of net exports?
The Price level in the US relative to the price levels in other countries

The growth rate of GDP in the US relative to the growth rates of GDP in other countries

The exchange rate between the dollar and other currencies
If inflation in the US is lower than in other countries, prices of US products increase more ______ then the prices of products of other countries
slowly
If inflation in the US is lower than in other countries, prices of US products increase more slowly then the prices of products of other countries. This _________ the demand for US products
increases
US Exports increase and Imports decrease – net exports _________
increases
As GDP increases in the US, incomes of households rise, increasing ____________
Consumption
When incomes rise faster in the US than in other countries, US consumers’ purchases of foreign goods and services increase ______ than foreign consumers’ purchases of US goods and services. Making net exports ____
faster, fall
When incomes in the US rise more slowly than incomes in other countries, net exports ____
rise
As the value of the US dollar rises, the foreign currency price of US products sold in other countries rises, the dollar price of foreign products sold in the US _____
falls
An increase in value of the dollar will ______ exports and ________ imports, so net exports will ____
An increase in value of the dollar will reduce exports and increase imports, so net exports will fall
A decrease in the value of the dollar will ________ exports and ______ imports, so net exports will ____
A decrease in the value of the dollar will increase exports and reduce imports, so net exports will rise
What is used to illustrate macroeconomic equilibrium?
45 degree line diagram
What is macroeconomic equilibrium?
When the quantity of good produced increases at the same rate as the good being sold
All points above the 45 degree line – planned aggregate expenditure will be _______ than GDP
Greater
All points below the 45 degree line – planned aggregate expenditure will be ____ than GDP
less
Changes in GDP have a much greater effect on ___________ than on planned investment, government purchases or net exports
Consumption
The level of planned aggregate expenditure at any level of GDP is the amount of consumption spending at that level of GDP plus what?
The level of planned aggregate expenditure at any level of GDP is the amount of consumption spending at that level of GDP plus the sum of the constant amounts of planned investment, government purchases, and net exports
At the point where the AE line crosses the 45 degree line, planned aggregate expenditure is _____ to GDP, and the economy is in what?
Equal, Macroeconomic equilibrium
Where can Macroeconomic equilibrium occur on the 45 degree line?
Macroeconomic equilibrium can occur at any point on the 45 degree line
Where is it ideal for macroeconomic equilibrium to occur on the 45 degree line?
Ideally would like it to occur at potential GDP
Natural rate of unemployment = ___ employment
Full Employment
What is full employment?
Everyone in the labor force who wants a job will have one, except the structurally and frictionally unemployed
If there is insufficient total spending at macroeconomic equilibrium, What 3 things will happen?
Equilibrium will occur at a lower level of real GDP

Many Firms will be operating below normal capacity

Unemployment rate will be above the natural rate of unemployment
Whenever planned aggregate expenditure is less than real GDP, some firms will experience what?
Whenever planned aggregate expenditure is less than real GDP, some firms will experience unplanned increases in inventories
What causes the multiplier effect?
An increase of autonomous expenditure will have a multiplied effect on equilibrium GDP
What is an autonomous expenditure?
an expenditure that does not depend on the level of GDP
What are examples of autonomous expenditures?
Planned investment spending, government spending, and net exports
Consumption has both an __________ component and _______component
Autonomous and induced
The ratio of the increase in equilibrium real GDP to increase in autonomous expenditure is called the __________
Multiplier
What is the multiplier effect?
The series of induced increases in consumption spending that results from an initial increase in autonomous expenditure is called the multiplier effect
What is the formula for the multiplier?
1/(1-MPC)
How does the multiplier effect the economy?
The multiplier effect makes the economy more sensitive to changes in autonomous expenditure than it otherwise would be
The larger the MPC, the ________ the value of the multiplier
larger
The larger the MPC, the larger the value of the multiplier, why?
This is because the larger the MPC, the more additional consumption takes place after each rise in income during the multiplier process
Why is the formula for the multiplier oversimplified?
The formula for the multiplier 1/(1-MPC) is oversimplified because it ignores some real-world complications, such as the effect that increases in GDP have on imports, inflation, interest rates, and individual income taxes
Explain the Paradox of Thrift
Saving appears to be favorable in the long-run for GDP might be counterproductive in the short run because spending increases GDP
Increased aggregate demand is followed by _________ production and prices
increased
_________ in the price level cause aggregate expenditure to fall, _________ in the price level cause aggregate expenditure to rise
increases, decreases
What are the three main reasons for the inverse relationship between price and aggregate expenditure
A rising price level decreases consumption by decreasing the real value of house-hold wealth; a falling price level has the reverse effect

If the price level in the United States rises relative to the price levels in other countries, US exports will become relatively more expensive, and foreign imports will become relatively less expensive, causing net exports to fall. A falling price level in the US has the reverse effect

When prices rise, firms and households need more money to finance buying and selling. If more money is not given, the result will be an increase in the interest rate, decreasing investment spending. When prices fall, the reverse happens
When the price level rises, the AE line shifts ____ on the 45 degree line
down
with higher prices, ____ spending will occur in the economy at every level of GDP
less
What is the aggregate demand curve?
A Curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all factors that affect aggregate expenditure
Fluctuations in the unemployment rate are caused mainly by fluctuations in what?
Real GDP
What is the Aggregate demand and aggregate supply model?
A model that explains short-run fluctuations in real GDP and the price level
The short-run aggregate supply shows what relationship in the short run?
The short-run aggregate supply shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
Why is the aggregate demand curve downward sloping?
The aggregate demand curve is downward sloping because a fall in the price level increases the quantity of real GDP demanded
Some household wealth is held in cash or other nominal assets that ____ value as the price level rises and ____ value as the price level falls
Lose, Gain
What is the wealth effect?
When the price level rises, the real value of household wealth, the real value of household wealth declines
What is the interest rate effect?
Rising prices drive up interest rates charged on loans
What is the international trade effect?
Price fluctuation on other countries‘ goods causes shifts in buying habits for people buying domestic or foreign products
Net exports equal the ________ by foreign households
Spending
The aggregate demand curve tells us the relationship between what two things?
The aggregate demand curve tells us the relationship between the price level and the quantity of real GDP demanded, holding everything else constant
If only the price level is changed, how will the economy move along an aggregate demand curve?
If only the price level is changed, the economy will move up or down a stationary aggregate demand curve
The federal government uses ________ policy and ______ policy to shift the aggregate demand curve
Monetary and fiscal
What is monetary policy?
The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives
How does monetary policy affect the aggregate demand curve
Lowering borrowing costs increases consumption and investment spending, shifting the aggregate demand curve to the right
What is fiscal policy?
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives
How does fiscal policy affect the aggregate demand curve?
Higher taxes reduce spending, shifting the curve to the left
Optimism increases spending – shifting the aggregate demand curve to the _____.
right
A fall of net exports will shift the aggregate demand curve to the ____
left
A change of net exports resulting from the change of the price level in the US will result in what?
A change of net exports resulting from the change of the price level in the US will result in movement along the aggregate demand curve, not a shift
Long run real GDP is determined by what?
Long run real GDP is determined by the number of workers, capital stock, and available technology
In the long run, changes in the price level _____ affect the level of real GDP
Don't
Real GDP in the long run is called what?
Real GDP in the long run is called potential or full employment GDP
What is the long run aggregate supply curve?
A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied
In the short run, As the price level increases, the quantity of supply of goods and services _________, making the SRAC slope how?
Upward
In the short run, As prices of final goods and services rise, prices of inputs – such as the wages of workers or the price of natural resources-rise more ______, resulting in the SRAC shifting how?
slowly, upward
Profits rise when the prices of goods and services firms sell rise more _______ than the prices they pay for inputs
Rapidly
Higher price level leads to higher profits and _________ willingness to supply
Increased
Why do firms adjust their price more slowly than others when the price level changes?
Because some firms and workers fail to accurately predict changes in the price level
If firms and workers could accurately predict the future price level exactly, the short-run aggregate supply curve would be __________ as the long run curve
the same
Prices and wages are said to be ______ when they do not respond to changes in demand or supply
sticky
What are Menu Costs?
Costs to firms changing prices are called Menu Costs
What does the Short Run Aggregate Supply curve tell us?
The short-run aggregate supply curve tells us the short-run relationship between the price level and the quantity of goods and services firms are willing to supply, holding constant all other variables that affect the willingness of firms to supply goods and services\
What variables shift the short run aggregate supply curve?
Increases in the Labor Force and In the Capital Stock
Technological Change
Expected Changes in the Future Price Level
Adjustments of workers and firms to errors in past expectations about the price level
Unexpected changes in the price of an important natural resource
Increase in productivity shifts the SRAS curve to the _____
Right
If workers and firms expect the price level to increase by a certain percentage, the SRAS curve will shift how?
If workers and firms expect the price level to increase by a certain percentage, the SRAS curve will shift by an equivalent amount, holding constant the other variable
If workers and firms across the economy are adjusting to the price level being higher than expected, the SRAS curve will shift to the ____
left
What is supply shock?
An unexpected event that causes the short run aggregate supply curve to shift
What causes supply shock?
Often caused by unexpected increases or decreases in the prices of important natural resources that can cause firms’ costs to be different from what they had expected
In the long run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the ____ curve
Long run aggregate supply
What is stagflation?
A combination of inflation and recession, usually resulting from a supply shock
The recession caused by a supply shock _________ unemployment and _______ output
increases, reduces
The difficulty with the basic Aggregate Demand and Aggregate Supply Model arises from the following of two assumptions, what are they?
The economy does not experience continuing inflation
The economy does not experience long run growth
The Dynamic economic model takes into consideration which facts?
Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right
During most years, the aggregate demand curve shifts to the right
Except during periods when workers and firms expect high rates of inflation, the short-run aggregate supply curve shifts to the right
Changes in the price level and in real GDP in the short run are determined by shifts in the ____ and __ curves
SRAS and AD
If the AD curve shifts to the right by more than the LRAS curve, inflation results. Why?
If the AD curve shifts to the right by more than the LRAS curve, inflation results because equilibrium occurs at a higher price level
When a firm sells inventory, it is ___ counted in GDP
not