ECON 120 Exam 4 - Abajian

If the multiplier is 6, then the MPC is

(1 / 1 - x) = 6, so x = 0.83

AD Shift Factors

- Consumption - Investment - Government Spending - Net Exports - Money Supply - Taxes

how do taxes affect AD?

- Taxes increase, AD decreases (shift left) - Taxes decrease, AD increases (shift right)

If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

2

What is the short-run affect on AD?

As price level and output fall in the short run, AD increases As price level and output rise in the short run, AD decreases

How do changes in the money supply affect AD?

As price level and quantity increase, AD increases (shift right) As price level and quantity decrease, AD decreases (shift left)

What is the long-run affect on AD?

Changes due to unexpected price level will be temporary, LRAS is unaffected

what are automatic stabilizers?

Changes in fiscal policy that stimulate AD when the economy goes into recession without having to take away any deliberate action

How does Interest Rate affect Quantity of Money Demanded?

Movement Along the Curve

NX =

NCO

The Crowding-Out Effect is

The offset in AD that results when expansionary fiscal policy raises the interest rate and thereby reduce investment spending

expected price level change means

a shift

The classical theory argues that changes in the money supply

affect nominal variables but not real variables

Which of the following would shift money demand right?

an increase in the price level

If the exchange rate changes from 148 British pound per dollar to 155 British pound, the dollar has

appreciated

Marginal Propensity to Consume (MPC)

fraction of extra income that a household consumes rather than saves

Which of the following would be most likely to cause an appreciation of the dollar relative to foreign currencies?

higher interest rates

Which of the following shifts aggregate demand to the left?

households decide to save a larger fraction of their income

A Texas ranch sells beef to a U.S. company that sells it to a grocery chain in Japan. These sales

increase both U.S. exports and U.S. net exports

When price level rises, the number of dollars needed to buy a basket of goods

increases, and so the value of money falls

actual price level change means

movement along the curve

If the interest rate decreases

or if the price level increases, then people will want to hold more money

Economic variables whose variables are measured in goods are called

real variables

Stagflation exists when prices

rise and unemployment rises

Suppose the prices in the United States rise relative to prices in Japan. We expect that

the dollar will depreciate and the yen will appreciate

In Liquidity Preference Theory,

the interest rate adjusts to reach equilibrium

Fed buys / sells bonds,

the money supply increases / decreases