Macroeconomics Final Practice Questions

Why do European countries tend to have higher unemployment rates than US?

Many European countries provide more generous unemployment benefits than the US in terms of payment and duration. It provides a safety net to unemployed workers. On the other hand, one cost of such programs is that it could prolong unemployment as people take more time to look for work. Why bother taking a so-so job when you still have good benefit money flowing in? Workers will take a long time to find a good match for their skills, which leads to high unemployment.On top of that, European countries adopt Employment Protection Law (instead of Employment at will doctrine as in US). It means that it takes too much commitment for firms to hire, keep, lay off workers. So many firms are, in the first place, more caution and reluctant to hire workers, which leads to high unemployment.

Place the phases of the business cycle in order: Recession, Trough, Peak,Expansion. How long do each business cycle last?

Recession, Trough, Expansion, Peak/ Each business cycle lasts 7-10 years

Cost-push inflation occurs when there is ___________________.

Rising per-unit production costs.

What are the examples for the group "not in labor force?"

Stay at home parents, retirees, homeless, full-time students and discouraged workers

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Hundreds of hotels went bankrupt and laid off their workers due to theemergence of Airbnb and Vrbo

Structural

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Thousands of bus and truck drivers permanently lose their jobs when driverless,computer-driven vehicles make human drivers redundant

Structural

What determine the long-run trend of real GDP? What about the business cycle?

Supply-side factors such as technology and resources determine the long-run trend of real GDP, while overall expenditure (C+I+G+NX) determines the business cycle

What is the shortcoming of nominal GDP in measuring output based on the above graph?

The nominal GDP is not exactly showing real growth in the economy because the nominal GDP also changes due to inflation. Thus, the growth of nominal GDP can seem as though our economy is growing although real GDP is not growing.See 1974 data, real GDP growth rate is negative while nominal GDP growth rate is 8%

Why does the official unemployment rate understate the unemployment problem and what is an alternative measure for that?

The official unemployment problem is understated because it does not account for the quality of jobs (no distinction between full time and part time workers) and discouraged workers are not included in the labor force. An alternative measure would be to utilize the underemployment rate(unemployed + involuntary part timers + overqualified workers)/ labor force x 100%

Suppose there are 15 million part-time workers and 100 million full-time workers in an economy. 2 million of the part-time workers switch to full-time work. As a result, what happens to the unemployment rate?

The unemployment rate stays the same because the unemployment rate does not differentiate between part-timers and full-timers.

Why does GDP underestimate the actual amount of output produced in an economy?

There are a lot of underground economic activities that occur but are NOT counted in GDP. Likewise, GDP calculation dismiss non-market productive activities (growing foods in the backyard for your consumption)

Since 1980s, US economy has been characterized more and more by increasing market power, meaning each industry is dominated by powerful few firms. What does it imply about inflation?

There has been more potential for market power inflation. Companies can raise the prices without losing their customers since there is less competition in markets

Trump waged trade war on China in his presidency. What does it imply aboutinflation?

There was more imported inflation since tariff (taxes on imports) raises theprices of consumers goods and services

What are the two purposes of constructing the national income accounts?

They help assess the healthy of the economy and formulate policy to improve or safegaurd the economy.

Why are intermediate goods NOT counted in GDP calculation?

To avoid double-counting. The value of intermediate goods is already taken into account in the value of the final good

Interpret the production function, Y =f(N, L, K)

To produce output (Y), you need three difference types of resources (N,K,L). The relationship between Y and the resources are defined by technology, which is embedded in this production function. This function indicates that for an economy to grow, the economy needs more resources or/ and advanced technology. Y=Output = GDP N= Natural Resources L= Human Resources (Labor) K= Capital

What was a penalty system for each system if they broke a rule?

Tradition - Social disapproval Command - physical force Market - financial poverty

What are examples of tradition and command in a market system?

Tradition - Tipping, holiday gift-giving, bonuses, do-it-yourself (gardening, auto repair, painting yourhouse), cooperative ventures—fix your friends car, they buy pizza; unpaid housework and child-rearing; volunteerism, etc. Many activities you do for social relations not for your financial benefits. Command - All government production and distribution are command. Government decisions to buildschools, bridges, hospitals, tanks, is production determined by command. All taxation andredistribution (Social Security, etc.) is distribution determined by command. Some say market could not exist without healthy amounts of tradition and command.

What are the three economic systems in history and what is the main institution that governs an economy in each system?

Traditional - Social/Cultured/Religious institutions Command - Political institution Market - Economic institutions

Explain how net exports might be a negative amount?

When a country imports more than it exports. In other words, US buys more foreigners than the other way around.

What are the two critiques on Milton Friedman's argument, "Inflation is always and everywhere a monetary phenomenon ..... and the government is solely responsible for it.

1) More money supply does not always lead to demand-pull inflation if peoples pend the money to buy financial assets (contributing to asset inflation)rather than consumer goods and services. Or, people may not spend money at all. 2) Bank can create money, thereby creating demand-pull inflation

What caused/aggravated the Great Depression?

1. The Stock Market Crash of 1929 2. The Agricultural Drought and the Dust Bowl 3. The Smoot-Hawley tariffs, an attempt to raise tariffs (taxes on imported goods) 4. Attempts to balance the federal budget to avoid crowding out effect 5. Bank failures and the threat of collapse of the banking system

What is the natural rate of unemployment if the frictional, structural, and cyclical unemployment are 1.5%, 2%, and 4%, respectively?

1.5 + 2= 3.5% is natural rate of unemployment.

Jimmer's nominal income will go up by 10 percent next year. Inflation is expected to be −2 percent next year. By approximately how much will Jimmer's real income change next year?

12% = 10% - (-2%), Jimmer's real income will change 12% next year.

Suppose Marcus eats nothing but burritos for dinner. He buys 30 burritos eachmonth. During the last couple of weeks, Marcus noticed an increase in the price ofburritos. The price of burritos rose from $5.50 per burrito last month to $6.60 perburrito this month. Assume that Marcus has a fixed income of $165 that he canspend on burritos. How many burritos can Marcus afford to buy at the new priceof $6.60? What is the relationship between the purchasing power and inflation?

25 burritos ($165/$6.60) instead of 30 burritos ($165/$5.50)The purchasing power and inflation have negative (inverse) relationship. A higher inflation leads to less purchasing power.

Kaitlin wants to earn a real rate of interest of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?

4% + 3% = 7%, the lowest nominal interest rate is 7%

Suppose that a country's annual growth rates were 5%, 3%, 4%, −1%, −2%, 2%, 3%,4%, 6%, and 3% in yearly sequence over a 10-year period. Identify which stage of thebusiness cycle each year belong to.

5= expansion, 3= expansion, 4=peak, -1= recession, -2= trough, 2= expansion, 3= expansion, 4=expansion, 6= expansion, 3 = expansion

How long would it take for the price level to double if inflation persisted at (a) 2percent per year, (b) 5 percent per year, and (c) 10 percent per year?

72/2=36 years, 72/5=14years, 72/10= more than 7 years

Why Adam Smith calls the market-dominant system as "paradoxical"?

Individual pursuits for monetary gain create wealth for the nation as a whole (serves the well-being for society). Companies pursing profit is good for the society because they have to produce quality products and sell them at reasonable prices, which serves consumers. Workers pursing more income. is good for the society because they have to educate and train themselves to claim higher income, which increases productivity of the economy.

Who loses from inflation? Who gains (or are protected) from inflation?

Lenders, savers, and income earners who rely on the fixed income loses.Borrowers gains and income earners who have flexible income are protected from inflation.

Assume that there is a fixed rate of interest on contracts for borrowers andlenders. If unexpected deflation occurs in the economy, then who benefits?

Lenders. With a given nominal rate, deflation raise the real interest rate.

How, in general, do unemployment rates vary by age, race, ethnicity, gender ,occupation, and education?

Lower-skilled, younger, colored, and less-educated, workers tend to bear higher burdens (higherrate of unemployment) in recession

Jenn won a free ride to four years of college. During these four years, Jenn could also do any number of things, including: I. Travel the world. II. Work to gather savings and career experience. III. Become a professional dancer.

Whichever of I, II, III or any other opportunities she passed up is most valuable to her

In tradition societies, what was an economic reason for reciprocity: mutual gift giving?

You help me out when I'm in need and I help you out when you are in need. Gift giving is insurancesystem. Giving of a gift imposes on the recipient an obligation to give back some time in the future

Which of the following transactions would count in GDP in a current year?

a. Kerry buys a new sweater to wear this winter. . e. Karen buys a new car. h. Tesla buys new machinery and equipment. i. Foreigners buy new Ford automobiles. k. Lisa buys eggs, milk, flour, and butter to bake bread for consumption. l. Sam buys a new car produced in a foreign country. m. The U.S. Military buys new fighter jets from Boeing.

What is economics?

how society manages resources for material provisioning. All human communities throughout history have had to address the questions concerning material provisioning

Opportunity cost

is the value of the next-best alternative that is given up when a choice is made

Explain how the treasury and the central bank stabilize an unstable private economyusing Keynesian model (Y = C + I + G).

n a recession, consumption usually goes down since households cut down their spending on durable goods such as furniture, appliance, and car. What is worse, investment collapsed more than consumption during a recession since there are less investment opportunity given declining sale revenues and pessimistic view on future economy. If the government does not do anything, total income and output will collapse. That is exactly what happened during the Great Depression. The private sector spending was declining but the government did not do anything for the first 3-4 years because they followed neoclassical economic theory. They waited for market operations to get rid of the recession, but an economy went downward spiral.Keynes' theory justifies government intervention. First, the treasury department will increase their spending, thereby offsetting decreases in consumption and investment.The central bank can contribute to stabilizing an economy by boosting the private sectors pending. They lower interest rates, encouraging households and businesses to borrow and spend at a lower interest rates. It will, to some extent, prevent consumption and investment from going down further.On the other hand, in an expansion when the private sector spending is too high with inflation risk, the government lowers its spending but raises taxes. The central bank also increases the interest rate to discourage the private sector's borrowing.To sum it up, the treasury helps to stabilize the economy through a counter cyclical budget—spending falls and taxes rise in a boom, while spending rises and taxes fall in a 3recession. It means they run budget surpluses in expansion and deficits in recession in order to stabilize aggregate demand and thus GDP. Surplus is necessary to prevent high inflation while deficit is necessary to prevent recession

Which of the following is not an example of a final good or service (from theperspective of the national income accounts)?

new lawn mowers sold to consumers by Cut-Rite Lawn Equipment & Supplies in their retail store b. flowers and pots purchased by homeowner Joe Smith for his garden c. a new string trimmer purchased by Green Grass Lawn Care Services, which employees will use to maintain customer's yards (Capital Good is part ofGDP) Seedlings and saplings purchased by resale by Wendy's Garden Center (Intermediate Good in NOT part of GDP) CORRECT ANSWER

When inflation occurs, ___________________.

prices of consumers goods and services including imports are rising

Which variables are counter-cyclical among profit, inflation, unemployment, wages, private debt, public debt, government budget (tax revenues - government spending), financial market, and import?

unemployment and public debt

In the Keynesian model, what fundamentally drives the economy?

Aggregate demand (AD) determines GDP (total output/income). Firms will produce as much as what is demanded by consumers (C), Businesses (I), Government (G), and foreigner (X)

Define aggregate demand and identify its four sources

Aggregate demand (AD) is the overall demand for GDP from four different sources: C + I + G + NX at different average prices or price levels. AD is downward-sloping because as the price level decreases the demand for real GDP from all the sources of aggregate demand increases, and vice versa. For example, if the price level falls, then consumers, governments, businesses, and foreigner scan afford to purchase more U.S. output

What is a Keynesian way to solve the issue of a low saving rate in US?

Businesses have to invest more. More investment (I) leads to more income (Y) and with more income (Y), households can afford to save more.A higher saving rate by households alone will not lead to more aggregate saving (S)because more saving means less consumption and less consumption means less income(Y). With less income (Y), households cannot afford to save more. It is called the paradox of thrift because an attempt by the economy as a whole to increase aggregate savings not only will not succeed, but may lower aggregate output, income and employment

Compare and contrast the long-run trend and short-run trend of US real GDP

The long run trend of US Real GDP is almost always growing and expanding while the short-runtrend of US real GDP is a series of ups and downs as in the business cycle.

The annual inflation rate measures the percentage growth rate of _______

CPI from one year to the next.

What are the two characteristics of capital goods and why does a company purchase them?

Capital good is output of production process and it is used as an input in other production process. Investment increases the productive capacity of the company and the quality of labor.

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. George used to work in an automotive assembly plant. He was laid off six 3months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve

Cyclical

What is the best way to fix each type of unemployment?

Cyclical: more spending from the government; structural: training or education programs that give marketable skill and education to potential workers; frictional: career services that match employee to employers

How does deflation and disinflation differ from inflation?

Deflation is a decline in CPI (or negative rate of inflation) and disinflation isa decline in the inflation rate (CPI is still growing but at slower rate).

Using a chart to calculate GDP in the economy...

Income Approach: Wage + corporate profit + proprietors' income + rent + interest +taxes - Net foreign factor income

What causes economic growth?

Increased Resources: more natural resources, more and better quality of labor, more and better capital, and better technology

What would be adverse consequences for deflation and high inflation?

Deflation makes consumers postpone demand because they expect prices to fall in the future. It will lead to a recession Deflation leads to lower profit margins, lowering profits for businesses. It will lead to higher unemployment as firms seek to reduce costs by lower wages or laying off workers.Deflation increases the real value of debt. higher real debts on debors (borrowers) can be a big drag on consumer confidence.Deflation leads to more inequality because deflation causes a redistribution of income from debtors (poor) to creditors (rich)Deflation leads to falling asset prices, which, in turn, hits personal wealth and confidence. High inflation will rapidly erode their purchasing power. Moreover, households and businesses cannot make more accurate longer-run financial decisions about borrowing and lending and about saving and investment because high inflation creates the uncertainty on real interest rates.Therefore, it leads to less saving (lending) and less investment (borrowing),which causes less economic growth.

What would be a solution for each type of inflation?

Demand-pull inflation - Government raises the interest rate to discourage borrowings for consumption and investment; lowers government spending; collects more tax. More regulation on banks to discourage bank credit creation. Cost-push inflation - deregulation, tax credit or subsidy to encourage companies to produce more. Universal Childcare so that women can work.Income policy so that workers cannot ask for higher wages. Find alternative sources for resources to overcome shortages. Deglobalization (bring back jobs and factories to US) so that the productive capacity of the US would not rely on other countries' policies. Market power inflation - strong enforcement of anti-trust law to bring more competition in markets. Taxes on windfall profit to discourage too high markup.

Distinguish between demand-pull inflation and cost-push inflation. Which one is more likely to be associated with stagflation?

Demand-pull inflation is when demand is greater (growing faster) than supply. Such excess demand bids up the prices of consumer goods and services. Demand pull inflation takes place because there is too much money created by the government or banks. Cost-push (supply-based) inflation is when supply declines with a given demand because there is a supply shock (shortage in resources or disruption in supply-chain followed by rising prices in resources and inputs). Cost-puh inflation is associated with stagflation since less supply of goods and services come with high inflation and high unemployment. Demand pull inflation usually happens in an expansion

Is more government spending NOT always inflationary?

During a recession, demand for consumer goods and services are already declining. So, government spending is not inflationary and thus justified unless it is too much.

Why is inflation a cyclical variable?

During an expansion, demand for consumer goods and services grows faster than supply of goods and services, thereby creating demand-pull inflation.On the other hand, during a recession, the demand tends to decrease faster than the supply, causing deflation (disinflation). Over the business cycle, demand for goods and services usually changes more than their supply.

How did economics as a discipline come into being?

Economics as a discipline came into being as the economy finally became dis-embedded from other social, cultural, religious, and political institutions and finally we can study the economy as it is independently from other forces. Now, economic (market) institutions primarily determine production and distribution, and economics is basically the study of economics institutions, how economic institutions not social or political institutions decide what to produce, how to produce and who gets what.

Which type of expenditure is education? What about purchasing newly constructed house?

Education is considered as consumption. A newly purchased house is considered as investment because a house can be used as an income-earning tool (renting a house)

Define Gross Domestic Product (GDP) from the expenditure approach and the income approach. In other words, what are the components of GDP from each approach

Expenditure Approach: GDP = Consumption + Investment + GovernmentSpending + Net Export Income Approach: GDP =Wages + Rent + Interest + Rent + Proprietors Income/Corporate Profits +Taxes - Net foreign factor income

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Mollie had three job interviews in the past month but still has not gotten a job offer.

Frictional

What are the two macroeconomic goals?

Full employment and stable and low inflation at 2%

what is the indicator that measures the average output each person enjoys? This ratio os often used as a measure of standard of living?

GDP per capital/per person = RGDP/ #Population

What was the economic environment for Keynesian economic theory to emerge?

Great Depression. Then dominant theory, neoclassical macroeconomic theory could not explain the long-lasting downturn of the economy, which asked for a new theory.

What is core inflation and how is it calculated?

Headline inflation is the price increase of consumer goods and services while core inflation is the price increase of consumer goods and services minus food and energy. Prices of food (grain, fruit, and vegetables) and energy (gasoline and natural gas) are volatile. In tracking inflation, policymakers want to avoid being misled by food and energy prices. They are more interested in how the prices of stable components of the CPI (underlying inflation trend)are rising. Therefore, they exclude volatile components (food and energy)from the market basket to calculate core inflation. If core inflation is low and stable, policy makers are satisfied.

Why does distribution matter?

If distribution is not done fairly and equitably (NOT equally), social and political unrest happen

Explain why labor force participation rate declines during a recession?

In a recession, the number of discouraged workers and student enrollment increase. In addition, informal employment in the underground economy increases so that they can continue to receive government benefits such as unemployment benefit. As a result, those used to be in labor force shift to "not in labor force", lowering labor force participation rate

Explain why the short-run aggregate supply curve is upward-sloping

In the short run, firms often find that their input costs are fixed, or sticky. This may be the result of hiring minimum wage or contract employees where the contract for labor is fixed for several years. If the economy is operating at full employment, and the price level increases relative to input costs, total revenue (P × Q) increases, generating more profits. With more profits, firms expand production and employment. The result is that if the price level increases, so does real GDP. If the economy is operating at full employment, when the price level falls relative to input costs total revenue decreases, generating fewer profits or losses. With fewer profits or losses, firms decrease production and employment. The result is that if the price level falls, so does real GDP. In the short run, with sticky input costs, any change in the price level causes either more or less realGDP to be produced. Graphically, changes in the price level and corresponding real GDP produce an upward-sloping curve

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 2%. But if the rate of inflation was expected to be 4%, the bank would most likely charge the firm an annual interest rate of____.

Nominal interest rate = real interest rate + inflation premium, 2% + 4% =6%

Which industries are more affected by the business cycle?

Non-essential services, luxury goods, durable goods, capital goods, and tech industries are affected by the business cycle.

What are the three roles of prices in a market system?

Prices provide a standard of measure of value throughout the world Prices are used to efficiently distribute goods and resources throughout the economy Prices can act as a signal (incentive) to both producers and consumers

What are two economic problems that have faced our societies and briefly explain each problem

Production - What to produce? How to produce?; what is the most cost-efficient way to produce. Distribution - Who gets what?; Each society has to determine how to distribute the production in sucha way as to guarantee the reproduction of the community

Suppose the society produces one good - corn - using corn seed and labor. Suppose they produce500 bushels of corn output per year using 50 corn seed and 400 bushels of corn food to feedpopulation and reproduce the labor force. How much is the economic surplus in that society?After that, if 10 bushels of the corn surplus were added to the existing seed bin, all other thingsremaining the same, then 60 bushel of corn seed would produce 600 bushel of corn output withtechnology and population being same as before. How much is the economic surplus in thatsociety after using surplus to increase the size of the inputs?

Surplus = Output - Input Surplus: 500 - (400+50) = 50; use this surplus for redistribution and the society will repeat itself and be stagnant. From 50, let's save 10 and consume 40. Surplus = 600 - (400+60) = 140 Economy grows because we add more input to the production process

Choose a company and describe what resources the company uses to produce its commodity?

Tesla: What resources do they need to produce electric cars? Natural resources: lithium for battery, land, water Human resources: engineers, managers, ignitors Capital: factory, robot, machines, computers

Discuss why the aggregate demand curve slopes downward

The AD curve slopes downward as a result of three factors.1) The real balances effect. When the price level increases, the values of assets (such as savings, etc.) decrease. Consumers save more and spend less, decreasing aggregate demand for real GDP.2) The interest rate effect. When the price level increases, coupled with a fixed amount of income in the economy, the demand for dollars (or income) to maintain the current level of purchases (lifestyle) increases. If more dollars are spent on maintaining a lifestyle, fewer new goods and services are purchased, and aggregate demand decreases for real GDP.3) The foreign purchases effect. When the price level in the U.S. increases relative to other countries, imports increase and exports decrease, resulting in fewer purchases of new goods and services produced in the U.S. This causes a reduction in net exports, and aggregate demand for real GDP decreases.The AD curve slopes downward to reflect the inverse relationship between changing price levels and the amount of real GDP demanded. The reverse of each of these is true as well

What caused high inflation in 2021 and 2022?

The biggest reason for high inflation in 2021 and 2022 is a supply shock(covid-19) and following disturbances in supply-chain. Covid-19 caused lockdowns (i.e., zero Covid policy in China) in many countries, which led to lower US supply of consumer goods and services as US heavily relied on other countries' production. Covid-19 also led to labor shortage and rising labor cost since many workers (moms and old workers) were not willing to work. In addition, consumers' shift from retail shop to e-commerce created shortages in containers, warehouses, shipping boxes, bus drivers, etc. with relevant costs going up. Last, Russian's invasion to Ukraine worsened cost-push inflation especially in food and energy prices. The second major reason for the high inflation is market power inflation. As the cost of production went up, firms with market power increased markups over the costs. As a result, they not only recovered a loss from higher cost but also captured more profit for each item they sell. The final reason is demand-pull inflation. US consumers started to spend thesaving they accumulated in 2020. as covid-related restrictions were lifted upand people got vaticinated and were no longer afraid of the virus. With declining supply and rising demand, it is a perfect storm for highinflation.

Explain the conventional role (myths) of the State held by the public and the actualrole played by the State according to Mariana Mazzucato

The conventional role of the state is to create a business-friendly environment for new ideas to flourish through private sectors because the private sector is the one who are innovative, efficient, competitive, and dynamic and entrepreneurial while the state is assumed to be sluggish, meddling, and bureaucratic. In that sense, the economic purpose of the state to fix market failure, meaning the government has to make sure markets works well without intervention of government itself and without manipulation of other big players. This conception of the private and public sectors is so ingrained that many people accept it as fact without understanding the underlying truth of the state's role in innovation, market shaping, and economic growth. In actuality, the government takes on risky projects that the private sector is too afraid to invest in. The state is more willing and able to invest in risky projects especially in the earliest stages of investment such asResearch and Development when expected return is often very low and uncertain. The companies are then good at utilizing (putting together) those innovation found by the government and commercializing them. In that sense, the state plays a large role than conventionally conceived in creating possible entrepreneurial force in the economy.Uncovering the truth not only helps government policies to be better designed but can help the 'market' system become more innovative

What are the costs of unemployment?

The costs of unemployment include unequal burdens and hysteresis. Unequal burdens mean that minorities tend to bear higher burdens of unemployment and hysteresis refers to the unemployed becoming significantly more unemployable. There are a variety of social costs such as poverty, social isolation, crime, family breakdown, suicide, drug addiction, homelessness, school dropout, and regional deterioration. Also, it leads to decline in physical health, loss of self-respect, and increase in psychological stress, and loss for overall work experience

Explain how changes in the determinants of the aggregate demand components(consumption, gross investment spending, government purchases, and net exports) affect the aggregate demand curve

The equation for AD is Y = (C + I + G + NX). If any of the determinants that influence consumption, investment spending, government purchases, or net exports change, then the AD curve shifts. The AD curve shifts either to the right, to illustrate more spending on real GDP at each price level, or to the left, to illustrate less spending on real GDP a teach price level. The primary factors that influence consumption are changes in borrowing, wealth, taxes, or expectations. If borrowing increases, consumers have the ability to spend more, and the AD curve shifts right. (And if consumers are forced to spend less, the AD curve shifts left.) If the value of consumers' stock market portfolios(wealth) increase, consumers feel more comfortable spending more, and the AD curve shifts right (and vice versa).1 If taxes increase, consumption declines, as some consumption dollars are used to pay taxes. The AD curve shifts left (and vice versa). If consumer expectations improve, consumers will spend more, and the AD curve shifts right (and vice versa).Two determinants can impact gross investment spending: the expected rate of profit and the interest rate businesses must pay to borrow funds. If the expected rate of return increases and interest rates are unchanged, businesses invest more and the AD curve shifts to the right. (And if the expected rate of return decreases and interest rates are unchanged, businesses invest less and the AD curve shifts to the left.) If the interest rate increases, borrowing for investment spending becomes more expensive, meaning businesses decrease investment spending and cause the AD curve to shift to the left (and vice versa). If government purchases increase (say Congress passes spending bills on infrastructure), the AD curve shifts to the right. (And if government purchases decrease, the AD curve sh

What government can do to smooth out business-cycle fluctuations?

The government can adjust its spending; They spend more and tax less in a recession while they spend less and take more in an expansion

What is the fallacy of composition?

The logic of the "whole" is not necessarily the same as the logic of the "part". I.e., Stand at a baseball game to see better might be good for you, but if everyone does that, then no one would be better off.