MACRO 2

Assume OPEC (the Organization of Petroleum Exporting Countries) successfully increases oil prices. How will aggregate supply (AS) be affected?

AS will decrease (shift to the left)

Assume that unions have grown more aggressive recently, and as a result, wage rates have risen. How will aggregate supply (AS) be affected?

AS will decrease (shift to the left)

Assume that the government imposes new strict environmental rules on businesses that require businesses to conduct an annual environmental impact statement for each business. This new requirement have added additional costs to business operations. How will aggregate supply (AS) be affected?

AS will decrease (shift to the left).

Assume that research shows that declining American schools have led to a decrease in the skills of American workers and managers. How will aggregate supply (AS) be affected?

AS will decrease (shift to the left).This

Assume that a giant natural gas discovery decreases energy prices. How will aggregate supply (AS) be affected?

AS will increase (shift to the right)

Assume that computer technology brings new efficiency to industry. How will aggregate supply (AS) be affected?

AS will increase (shift to the right)

Assume that labor productivity increases dramatically. How will aggregate supply (AS) be affected?

AS will increase (shift to the right)

Assume that recent measurements of the CPI (consumer price index) shows that price levels have been rising recently. How will aggregate supply (AS) be affected?

AS will not shift; rather, we will move along the AS curve, up and to the right.

In order to reduce the federal debt, the government decides to raise personal income taxes by 10% across the board. (C & S shifts)

Both the consumption (C) and savings (S) schedules will decrease.

An anti-tax movement sweeps the country, and Congress passes legislation to abolish the personal income tax (C & S shifts)

Both the consumption (C) and savings (S) schedules will increase.

A country's government is unable to enforce property rights and the country is on the verge of a civil war

Discourages economic growth

The government permanently raises taxes on businesses (effect on economy)

Discourages economic growth

Government agencies establish regulations to maintain natural resources at sustainable levels

Encourages economic growth

Labor productivity increases as a result of a new education initiative

Encourages economic growth

Research and development leads to improvements in technology

Encourages economic growth

The government invests in improvements in the national highway system

Encourages economic growth

(indicate which component of AD is represented) Taxes on businesses are raised.

Investment

(indicate which component of AD is represented) Reduced business confidents leads to a reduction in investment spending.

Investment

What happens to the APC as DI rises?

It decreases

If Congress cuts taxes, what will happen with regard to aggregate demand (AD)?

It will increase, and shift to the right.

(indicate which component of AD is represented) New tariffs on imports lead to a trade war that reduces exports by more than it reduces imports.

Net exports

Expansionary economic policy leads to lower interest rates for consumers

No effect on economic growth (shifts AD)

How can savings be negative?

People are borrowing or reducing their savings to be able to consume at the particular level of income.

There is a large increase in the value of real estate, including private homes (C & S shifts)

The consumption (C) schedule increase, and the savings (S) schedule will decrease.

Consumers have been running up their credit card bills over the last decade, and credit card debt is at an all-time high (C & S shifts)

The consumption (C) schedule will decrease, and the savings (S) schedule will increase.

The government decides to reduce Social Security benefits, and raise the retirement age to 75 (C & S shifts)

The consumption (C) schedule will decrease, and the savings (S) schedule will increase.

There has been a sharp, sustained decline in stock prices (C & S shifts)

The consumption (C) schedule will decrease, and the savings (S) schedule will increase.

Americans consumers confidence is on the rise as the public have positive expectations as a new President takes office and the international economy is growing (C & S shifts)

The consumption (C) schedule will increase, and the savings (S) schedule will decrease.

Due to a recent recession, consumers have become very fearful of debt and have paid off their student loans, home loans and car loans in record numbers. Now with less debt and the recession over what will happen? (C & S shifts)

The consumption (C) schedule will increase, and the savings (S) schedule will decrease.

Why must the sum of the MPC and MPS always equal 1?

The only choice people have is to consumer or to save. Thus, an additional dollar in income must result in a change in consumption and/or change in savings. The sum of the change must be one.

Average Propensity to Consume (APC)

The ratio of consumption to disposable income (C/DI = APC)

Because the nation is experiencing unusually low rates of spending and high unemployment, the government lowers household income tax rates and increases military spending (effect on economy)

This will NOT lead to economic growth

The central bank expands the money supply in an attempt to boost spending and recover from a recession (effect on economy)

This will lead to economic growth

With renewed emphasis on education, the nation's high school graduation rate increases from 70 percent to 85 percent, and the literacy rate rises from 98 percent to 99.5 percent (effect on the economy)

This will lead to economic growth

The stock market collapses, and investors lose billions. What will happen with regard to aggregate demand (AD)?

a. It will decrease, and shift to the left.

Surveys show that consumer confidence has jumped - households are feeling very optimistic about the future of the U.S. economy. What will happen with regard to aggregate demand (AD)?

a. It will increase, and shift to the right.

The president announces a new $30 billion initiative to put a person on Mars. What will happen with regard to aggregate demand (AD)?

a. It will increase, and shift to the right.

In order to deal with its massive budget deficits, the federal government decides to cut its spending by 10%. What will happen with regard to aggregate demand (AD)?

c. It will decrease, and shift to the left.

Interest rates drop, and as a result, businesses decide to make more investments. What will happen with regard to aggregate demand (AD)?

c. It will increase, and shift to the right.

The GDP Price Deflator is showing that price levels have been dropping in the economy (btw, this is known as "deflation"). What will happen with regard to aggregate demand (AD)?

c. It will not shift, but there will be a movement down and to the right along the existing demand curve

Recent CPI figures show that price levels have risen recently. What will happen with regard to aggregate demand (AD)?

c. It will not shift, but there will be a movement up and to the left along the existing demand curve.

Marginal Propensity to Save (MPS)

change in savings divided by change in disposable income

(indicate which component of AD is represented) Stock market collapses; investors lose billions

consumption

(Indicate which component of AD is represented) Government spending increases with no increase in taxes.

gov spending

Average Propensity to Save (APS)

ratio of savings to disposable income (S/DI = APS)

Marginal Propensity to Consume (MPC)

the change in consumption divided by the change in disposable income

The government provides subsidies and tax incentives for firms to research new, more efficient, technology in production. (How will it effect the economy?)

this will lead to economic growth