ECON 2301 Exam 3
Why does the SRAS curve slope upward?
- Contracts keep wages "sticky" - Prices of final goods rise more quickly than prices of inputs - Firms and workers fail to predict changes in the price level
The three potential explanations for why the SRAS curve is upward-sloping
- Contracts make some wages and prices "sticky" - Firms are often slow to adjust wages - Menu costs make some prices "sticky"
What affects the level of consumption?
- Current disposable income - Household wealth - Expected future income - The price level - The interest rate
Why is spending on durable goods so volatile?
- Durable goods are long-lived - Good substitutes exist - High prices make them risky purchases - Increased demand typically follows a recession - Interest rates fluctuate
What affects the level of investment?
- Expectations of future profitability - The interest rate - Taxes - Cash flow
What affects net exports?
- Price level in U.S. vs. the price level in other countries - U.S. growth rate vs. growth rate in other countries - U.S. dollar exchange rate
The sum of MPC and MPS equals __________
1
Planned Investment (I)
Actual investment - unplanned change in inventories
Supply-Side Economics
An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.
Autonomous Expenditure
An expenditure that does not depend on the level of GDP
Supply Shock
An unexpected event that causes the short-run aggregate supply curve to shift
Indicate which of the following is correct about the multiplier effect: A. A decrease in autonomous spending decreases real GDP by a multiple of the change B. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates C. The larger the MPC, the more additional consumption that occurs D. All of the above
D. All of the above
Changes in the price level affect the level of GDP in the long run (T or F)
False
Budget Surplus
Government Expenditures < Tax Revenue
Budget Deficit
Government Expenditures > Tax Revenue
Contractionary Fiscal Policy
Involves decreasing government purchases or increasing taxes
Expansionary Fiscal Policy
Involves increasing government purchases or decreasing taxes
Discretionary Fiscal Policy
Involves intentional changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals
Countercyclical Fiscal Policy
Involves methods intended to counteract business cycle fluctuations
Monetary Policy
Manages the economy by altering the money supply and interest rates
The accumulation of more machinery and equipment will cause the long-run aggregate supply curve to shift to the (right/left)
Right
Marginal Propensity to Consume (MPC)
The amount by which consumption spending changes when disposable income changes
Marginal Propensity to Save (MPS)
The amount by which saving changes when disposable income changes
The Multiplier
The change in equilibrium real GDP divided by the change in autonomous expenditures; 1 / (1 - MPC)
The Multiplier Effect
The process that occurs when an increase in autonomous consumption leads to a bigger increase in real GDP
Consumption Function
The relationship between consumption spending and disposable income
Aggregate Expenditure (AE)
The total spending in the economy: Consumption (C) + Planned Investment (I) + Government Purchases (G) + Net Exports (NX)
Every time the federal government runs a budget deficit, the Treasury must __________
borrow funds from savers by selling U.S. Treasury securities
The most important determinant of consumption is __________
current disposable income
When the tax rate increases, the size of the multiplier effect __________
decreases
"Sticky"
does not respond quickly to changes in demand or supply
American Recovery and Reinvestment Act of 2009 is an example of a(n) ___________
expansionary fiscal policy
Budget deficits automatically __________ during recessions and __________ during expansions.
increase; decrease
An increase in __________ will cause savings to increase
interest rates
The cyclical adjusted budget deficit __________
is measured as if the economy were at potential real GDP
The delay caused by the legislative process is typically (shorter/longer) for fiscal policy than for monetary policy
longer
Interest Rate Effect
occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand
At some point, the government may have to __________ to pay interest on the debt
raise taxes or cut spending
The Aggregate Demand and Aggregate Supply Model explains __________
short-run fluctuations in real GDP and the price level
We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier
smaller
The 1974-1975 recession was a result of __________
supply shock that caused a leftward shift of the short-run aggregate supply curve
A fall in the price level affects AD through __________
the Wealth Effect, the Interest Rate Effect, and the International-Trade Effect
If firms reduce investment spending and the economy enters a recession, then __________
the eventual agreement by workers to accept lower wages will contribute to the adjustment that causes the economy to return to its long-run equilibrium
Variables that Shift the Aggregate Demand Curve
- Monetary policy: the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives - Fiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives - Households' and firms' expectations about the future - Changes between domestic and foreign GDP and exchange rate
According to the dynamic AD-AS model, what is the most common cause of inflation?
- Total spending increases > total production - AD increases > LRAS
Stagflation
A combination of inflation and recession
Aggregate Demand (AD) Curve
A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government (both inside and outside of the country)
Long-run Aggregate Supply (LRAS) Curve
A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied
A decrease in the size of the labor force will shift the short-run aggregate supply to the (right/left)
Left
Fiscal Policy
Manages the economy by controlling taxing and spending
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
Which of these statements is true? A. Autonomous expenditure does not depend on the level of GDP B. No part of consumption is autonomous C. Autonomous expenditure depends on the level of GDP
A. Autonomous expenditure does not depend on the level of GDP
Macroeconomic Equilibrium (aka AE = GDP)
When Planned Investment (I) equals Actual Investment (I)
Paradox of Thrift
When something appears to be favorable in the long-run but may be counterproductive in the short-run
Wealth Effect
When the price level falls, the real value of household wealth rises, and so will consumption
Equilibrium GDP = Autonomous Expenditure x Multiplier
Y = (C + I + G + NX) x (1 / (1 - MPC))
Tax Wedge
the difference between the pretax and posttax return to an economic activity
The national debt is best measured as the __________
total value of U.S. Treasury securities outstanding
The largest and fastest-growing category of federal government expenditures is __________
transfer payments
Short-run Aggregate Supply (SRAS) Curve
A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
Crowding Out
A decline in private expenditures as a result of an increase in government purchases
Automatic Stabilizer
A form of government spending or taxation that automatically increases or decreases along with the business cycle (eg. unemployment benefit program)
