Final Econ Test

Why does Investment causes the AD curve to slope downward?

A higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded.

What are the three macroeconomic indicators that fluctuate together?

-Investment Spending -Unemployment Rate -Real GDP

What are the four variable that shift LRAS?

-Labor -Capital -Natural Resources -Technological Knowledge

Shifts arising in changes in Natural Resources; The LRAS

...

Shifts arising in changes in capital; The LRAS

...

Shifts arising in changes in natural resources; The LRAS

...

What are the four components that contribute to the aggregate demand for goods and services?

1) Government Spending is fixed by policy 2) Consumption 3) Net Exports 4) Investment They depend on economic conditions & the price level.

What are the three methods the Feds uses to control the money supply?

1) Open Market Operations 2) Required Reserve 3) Discount Rate

What are the three reasons for the downward slope of the AD curve?

1)Consumption 2)Investment 3)Net Exports

How does Investment cause a shift in the AD curve?

An increase in the money supply lowers the interest rate in the short run, this decrease in the interest rates makes borrowing money less money, which stimulates investment spending & shifts the AD curve to the right. A decrease in the money supply raises the interest rate in the short run, discourages investment spending. Now shifting the AD curve to the left.

Why does Consumption cause the AD curve to slope downward?

An increase in the price level reduces the real value of money and makes consumers poorer, which reduces consumer spending & the quantity of goods and services.

What is the Market for Money?

Basically the money supply, and how shifts in the money supply affect interest rates in general

Why is the LRAS curve vertical, while the SRAS curve is upward?

Because the price level does not affect the long-run determinants of Real GDP. Basically, the 4 variables determine the total quantity of goods & services supplied, & this supplied is the same regardless of what the price level is.

How does Consumption cause a shift in the AD curve?

Because the quantity of goods and services demanded at any price level is lower, the aggregate demand curve shifts to the left. (Decreases in consumer spending shifts the curve to left) Increase in consumer spending will shift the AD curve to the right.

If Congress cuts spending to balance the federal budget, the Fed can act to prevent unemployment and recession by..

Buying bonds to increase the money supply

TRUE OR FALSE : An economy that depletes (uses up) a large source of an important mineral used in the production of many goods should see the LRAS (Long Run Aggregate Supply) curve shift to the right, reflecting an increase in the Natural Rate of Production.

False

TRUE OR FALSE : Money on deposit at the Federal Reserve Bank is considered part of the money supply.

False

Shifts arising in Labor; The LRAS

For example, an increase in immigration. A greater number of workers, the quantity of goods and services supplied would increase. As a result, the supply curve would shift to the right. For example, a change in natural rate of unemployment will shift the curve. If Congress were to raise the minimum wage, the NROU would rise & the economy would produce a smaller quantity of goods and services. As the long-run result, it would shift the curve to the left. If the Natural rate of unemployment would fall, ( from a reform of the unemployment insurance system causing workers to search for new jobs), in the long run, the curve would shift to the right.

What happens when the money supply increases?

High money supply means lower interest rates, which gives us expansionary

What is the relationship between Aggregate Supply and the overall price level in the long run?

In the short run, a change in the price level affects the level of output, but in the Long Run, the level of output is unaffected by any changes in the price level.

As Exports ______, then Real GDP __________

Increase; Increase

If the The Federal Reserve decreases the Required Reserve, what would be in outcome to the interest rates?

Interest rates fall

If An investor sells U.S. Treasury Bonds to the Federal Reserve Bank, then what would happen to the interest rates?

Interest rates fall.

If the Federal Reserve Bank buys U.S. Treasuries from investors, what would happen to the interest rates?

Interest rates fall.

If the The Federal Reserve increases the Required Reserve, what would be in outcome to the interest rates?

Interest rates rise

If the Federal Reserve Bank sells U.S. Treasury Bonds to investors, what would happen to the interest rates?

Interest rates rise.

What happens when the money supply decreases?

Lower money supply higher interest rates, which gives us contractionary

When the Long Run Aggregate Supply (LRAS) curve shifts in, to the left, then..

Output decreases

When the AD curve shifts out, to the right, (ceteris paribus), the outcome in the short run is...

Output increases, price level increases

If consumers become overly confident about the economy, the Fed can also act to prevent inflation by doing what?

Raising the Discount Rate.

How does Government Purchases shift the AD curve?

Reducing government purchases shifts the AD to the left. Increasing government purchases will shift the AD curve to the right.

What are the two responsibilities of the Federal Reserve?

Regulate banks & ensure the health of the banking system To control the quantity of money that is made available in the economy (money supply)

If consumers become overly confident about the economy, the Fed can act to prevent inflation by doing what?

Selling bonds to decrease the money supply.

Feds/Investors

Since all money sent to the Federal Reserve Bank flows out of the money supply and therefore decreases it, either the Fed selling treasury bonds or investors buying treasury bonds will decrease the money supply. On the other hand, any money flowing out of the Federal Reserve Bank into depositors' accounts increases the money supply, so the Fed buying treasury bonds or investors selling treasury bonds will increase the money supply.

What would shift the long-run aggregate supply curve to the right?

Technological progress and an increase in human capital.

The Components of the Federal Reserve Bank System

The Market for Money The Fractional Reserve System The Discount Rate

What is the Multiplier Effect?

The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

An investor buys U.S Treasury Bonds from the Federal Reserve, which causes what outcome to the money supply?

The money supply decreases

The Federal Reserve Bank sells U.S. Treasury Bonds, which causes what outcome to the money supply?

The money supply decreases

An investor sells U.S Treasury Bonds to the Federal Reserve, which causes what outcome to the money supply?

The money supply increases

The Federal Reserve Bank buys U.S. Treasury Bonds, which causes what outcome to the money supply?

The money supply increases

What happens when the Fed buys U.S. Treasury Bonds?

The money supply increases

Define Natural Rate of Output

The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.

What is fiscal policy?

The setting of the level of government spending and taxation by government policy makers

What are two examples of automatic stabilizers?

The tax system & the unemployment insurance program

What is the importance of the Classical Macroeconomic Theory?

To be the total quantity of goods and services demanded & the total quantity of goods and services supplied

How does the Open Market operations work?

To buy or sell government bonds. The Fed will get bond traders to buy bonds from people in the public which will increase the money supply. The dollars that the Fed pays for the bonds increase the number of dollars in the economy. To reduce the money supply, the Fed will sell the bonds to the public.

TRUE OR FALSE : An economy that experiences an orderly increase in the immigration rate should also see the LRAS (Long Run Aggregate Supply) curve shift to the right, reflecting an increase in the amount of Labor (a resource)

True

How do Net Exports shift the AD curve?

When foreign markets buys fewer goods from the US this reduces the US Net Imports causing the AD curve to go to the left. When foreign markets buys more goods from the US, this will increases the US Net Imports causing the AD curve to shift to the right.

What is the effect of interest rates upon the economy in general?

When interest rates are high, people are gonna cut back in the economy which would decrease the money supply. When interest rates are low, people are gonna be more willing to spend money in the economy, which will increase the money supply.

Why does Net Exports causes the AD curve to slope downward?

When the U.s price level rises, and causes U.S interest rates to rise, the real value of the dollar increases and this appreciation reduces U.S Net Exports and the quantity of goods and services demanded.

Is the money supply on deposit within the Fed part of the money supply?

Yes, the feds can not control or predict the behavior of depositors and bankers but the money supply on deposits is a part of the money supply within the fed.

Crowding out occurs because of what?

an offsetting reduction in aggregate demand that occurs because of increased interest rates. Rates increase when the demand for money increases, caused by an expansion in government spending.

Which of the following Fed actions would both increase the money supply

buy bonds and lower the reserve requirement

What is the Fractional Reserve System?

how changes in the Required Reserve shift money supply and affect interest rates in general

What is the Discount Rate?

how it affects interest rates in general through bank borrowing

When the Federal Reserve Bank takes action to increase the money supply, then what happens?

interest rates decrease and the economy is stimulated.

If policymakers increase aggregate demand, then in the short run the outcome is what?

price level rises and unemployment falls.

What does the AD-AS model illustrate?

the change in output and price level in the economy when a variable of AD or AS changes

Marginal Propensity to Consume (MPC)

the fraction of extra income that a household consumes rather than saves

Aggregate Demand is defined as..

the quantity of goods and services that households, firms, and government buy.

One key purpose of the Federal Reserve Bank is :

to control the quantity of money in the money supply.