Macro

In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion. What is net capital outflow?

$150 billion Start with S = Y - C - G and substitute: S = 1850 - 975 - 225 = $650 billion. If investment equals $500 billion, then NCO = S - I = $150 billion.

If a country had a trade surplus of $50 billion and its exports rose by $30 billion while its imports rose by $20 billion, its net exports would now be

$60 billion.

In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion, and net exports equals $150 billion. What is national savings?

$650 billion

Suppose that in an economy GDP is equal to 11,000, taxes are equal to 1,500, consumption equals 7,500, and government purchases equal 2,000. What is national saving?

1,500

Which of the following is included in the supply of U.S. dollars in the market for currency exchange in the open-economy macroeconomic model?

A U.S.-based law firm wants to build a new office in Japan. (A) affects U.S. NX, not U.S. NCO — it is not a flow of funds but a flow of goods. (B) has no international component at all. That leaves (C).

Which of the following is correct? A. The short-run, but not the long-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables. B. The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables. C. The long-run and short-run supply curves are both consistent with the idea that nominal variables affect real variables. D. Neither the long-run nor the short-run aggregate supply curve is consistent with the idea that nominal variables affect real variables.

ANS: B The vertical shape of the long-run aggregate supply curve reflects the absence of any relationship between nominal variables (such as the price level) and real ones (such as real output), an absence that we do expect to exist from a long-run perspective. That is, we do expect monetary neutrality to hold from a long-run perspective.

Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries.

Fran is saving; Miller is investing

Which of the following is not an alleged disadvantage of expansionary monetary policy?

It tends to worsen the government's budget deficit.

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative. In a closed economy, S = I. Since S = Y - C - G = (Y - C - T) + (T - G), we have (Y - C - T) + (T - G) = I. If there is a government deficit, then (T - G) < 0, and if there is positive investment, then I > 0. Given this, the only way for the equation (Y - C - T) + (T - G) = I to hold will be if (Y - C - T) > 0. In other words, private saving must be positive and public saving must be negative.

The corporation Titan Bikes borrows funds from U.S. capital markets to build a factory in the U.S. and also to build a factory in Denmark. Borrowing for the factories in which location(s) is (are) included in the demand for U.S. loanable funds?

The U.S. and Denmark. The U.S. factory constitutes U.S. demand for U.S. loanable funds; the factory in Denmark constitutes foreign demand for U.S. loanable funds. Either way, both comprise parts of worldwide demand for U.S. loanable funds. The former is part of I and the later is part of NCO. That is, both are parts of IW = I + NCO. Hence, the answer is (C). Note that the nationality of Titan Bikes itself is irrelevant (it's not even specified in the problem). It could be a Russian corporation, for all it matters.

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

The demand for loanable funds would shift right. The most important factor affecting investment, i.e., demand for loanable funds, is the interest rate, which is why the interest rate is on the vertical axis of the loanable-funds market graph. When any other factor affecting investment changes, such as an investment tax credit, then the investment curve itself will shift. In particular, an investment tax credit rewards investment by reducing the investor's tax bill when they do invest, which thereby incentivizes investment.

In the short run, what will happen to the economy's equilibrium price level and equilibrium quantity of output if income taxes are raised?

The equilibrium price level and quantity of real output will both decrease.

Consider the expressions (T - G) and (Y - T - C). Which of the following statements is correct?

The first of these is public saving; the second one is private saving.

Which of the following events could explain a decrease in interest rates together with an increase in the quantity of investment spending?

The government reduced the tax rate on savings. Suppose the supply curve in the market for loanable funds shifted right. Then there would be a decrease in the interest rate plus an increase in the quantity of investment. Why might the supply curve shift right? One way would be to increase the incentives for people to save, such as by reducing taxes collected on their savings. This would generate such a curve shift in the first place. Note that of all the factors affecting saving, only changes in the interest rate r will produce movements along the S curve in the loanable-funds market graph. Changes to any other factor affecting national saving = (Y - C - T) + (T - G) will shift the S curve itself. But this makes sense; it is just the familiar principle that changes in a market to variables on one of a graph's axes produce movements ALONG curves (terminology: change in quantity of something) while changes to variables not on either of the graph's axes produce movements OF curves (terminology: change in the thing itself).

Which of the following is correct concerning recessions?

They are associated with comparatively large declines in investment spending. It is fluctuations in investment spending which are the main drivers of recessions and booms. The other spending categories, consumption and government spending, are much more stable (or in the case of government spending, even countercyclical).

Which of the following decreases if the U.S. imposes an import quota on computer components?

U.S. imports and U.S. exports.

Which of the following expressions is a correct definition of national saving?

Y - C - G In words, national income minus expenditures by households (C) and minus expenditures by government (G) is defined to be national saving. Note we can also add and subtract taxes (T) to write (Y - C - T) + (T - G), which is an equally valid way of writing national saving. Note also the definitions of national saving are not any different whether we are talking about an open economy or a closed one.

Which of the following equations correctly represents GDP for a closed economy?

Y = C + I + G

Which of the following equations correctly represents GDP for an open economy?

Y = C + I + G + NX

Other things the same, which of the following would make India's net capital outflow increase?

a decrease in Indian interest rates

Which of the following shifts short-run, but not long-run, aggregate supply right?

a decrease in the expected price level

Suppose the central bank pursues an unexpectedly expansionary monetary policy. In the short run, the effects of this are shown by

a movement upward and to the left along the short-run Phillips Curve

Advocates of stabilization policy would advocate which of the following for an economy experiencing severe unemployment?

a reduction in tax rates

The long-run result of government countercyclical policy (a.k.a., government stabilization policy) in response to a demand-driven recession will be

a return to the original pre-recession level of output, albeit at higher prices than if the economy had been allowed to self-correct.

In the AS-AD model, a decrease in consumer confidence will cause

a shift of the aggregate demand curve to the left.

A year-long drought that destroys most of the summer's crops would be considered

a short-run supply shock.

. In the 1970s, the Fed accommodated a(n)

adverse supply shock, and so contributed to higher inflation

In the AS-AD model, the relationship between the overall price level in the economy and total production by firms is shown by

aggregate supply curves.

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, thus increasing interest rates and hence decreasing investment spending.

When an economy's actual output differs from its potential output at some point in time, we say that it is experiencing

an output gap.

In the open-economy macroeconomic model, if the supply of loanable funds increases, then the interest rate

and the real exchange rate decrease. The increase in the supply of loanable funds reduces the interest rate and that in turn increases net capital outflows. The increase in NCO means an outward shift of the NCO curve in the market for currency exchange. When this happens, the equilibrium real exchange rate decreases.

Two of the economy's most important financial intermediaries are

banks and mutual funds. Financial intermediary means you give them your money and in turn they make the decision of to which investors the funds should be provided, rather than you making these decisions yourself, such as by purchasing stock directly.

Which of the following would both raise the U.S. exchange rate?

capital flight from other countries to the U.S. occurs and the U.S. moves from budget surplus to budget deficit because of higher government spending The capital flight to the U.S. would raise the U.S. exchange rate (people would need to convert their foreign currency into USD first in order to move their loanable funds into the U.S.). Meanwhile the U.S. government going from budget surplus to budget deficit would raise the U.S. interest rate which would have effects similar to capital flight into the U.S. as it would draw in savers' funds from abroad.

Automatic stabilizers

changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.

Domestic saving must equal domestic investment in

closed, but not open economies. In an open economy, equilibrium in the loanable funds market means S = I + NCO, and ordinarily NCO does not equal zero. But in a closed economy, NCO does equal zero, by definition, so in a closed economy equilibrium in the loanable funds market simply means S = I. That is, in a closed economy, all saving must be invested; there is simply no other place for saving to go, and the real interest rate is the mechanism which adjusts to ensure this is so. Similarly, in a closed economy all investment must come from saving; there is no other place it can come from.

If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment

decreases, and U.S. net capital outflow decreases. The supply curve in the U.S. loanable-funds market represents U.S. national saving. Hence when U.S. citizens save less, this curve shifts leftward, raising the equilibrium interest rate. The higher interest rate in turn decreases U.S. net capital outflows.

Demand from foreigners to buy U.S. bonds is accounted for on the _____ side of the U.S. market for loanable funds, and on the _____ side of the U.S. market for currency exchange

demand; supply Demand from foreigners to buy U.S. bonds is part of U.S. net capital outflow, which in turn shows up on the demand side of the U.S. market for loanable funds but on the supply side of the U.S. market for currency exchange

The short-run Phillips Curve is _____, but the long-run Phillips Curve is _____.

downward sloping; vertical

If a firm sells a total of 100 shares of its stock, then

each share represents ownership of 1 percent of the firm

Which of the following is most likely to increase exports?

ending investment tax credits An end to investment tax credits would shift the IW curve leftward in the market for loanable funds (remember IW = I + NCO; investment tax credits affect I specifically and by reducing I, IW is also reduced). The result would be a lower interest rate and hence a higher quantity of net capital outflows in panel 2 of the three-panel diagram. This in turn would lead to an outward shift of the NCO curve in the market for currency exchange and hence to a higher equilibrium quantity of net exports there. The other choices are wrong for the following reasons. (A) is wrong because a reduction in domestic political instability will lead to less capital flight and hence a higher interest rate. (C) is wrong because a reduction in the size of a government's budget surplus due to increased government spending will shift the supply curve inward in the market for loanable funds and thus also produce a higher interest rate.

On a given Phillips Curve, which of the following is held constant?

expected inflation

According to Milton Friedman and Anna Schwartz, the real cause of the Great Depression — what made the Great Depression "great" — was

failure by the U.S. Federal Reserve to prevent the nation's money supply from contracting in the wake of bank failures and deposit withdrawals.

An economic contraction caused by a reduction in aggregate demand will remedy itself over time (i.e., in the long run) as the expected price level

falls, shifting short-run aggregate supply right in the AS-AD model.

When the price level falls, the interest rate

falls. When the money supply falls, the interest rate rises.

From a long-run perspective, the result of a government responding to a negative supply shock by increasing its spending will be a

faster recovery than otherwise, but even greater inflation

Net capital outflow is defined as the purchase of

foreign financial assets by domestic residents, minus the purchase of domestic financial assets by foreign residents

Suppose that Greta, a U.S. resident, purchases a foreign bond. Her transactions are included

in the demand for U.S. loanable funds, as well as the supply of dollars in the U.S. market for currency exchange. This question is tricky. Remember that NCO can be thought of as net foreign DEMAND for domestic (U.S.) loanable funds, so this is where we will account for Greta's purchase of the foreign bond. This eliminates (A) and (B). Meanwhile NCO comprises the supply side of the market for currency exchange, so this eliminates (D).

The amount of real output which firms supply changes in response to changes in the price level

in the short run only. Eventually, from a long-run perspective, changes in the price level P are matched by changes to nominal wages; this returns real wage to its original point. When this return occurs, the aggregate quantity of real output supplied by firms returns to its starting level, meaning there has been no long-run change to the aggregate quantity of real output supplied. In the short run, by contrast, things are different.

Keynes explained that recessions and depressions occur because of

inadequate aggregate demand.

In an effort to move an economy currently in recession back to its full-employment level of output, a government could

increase spending in order to increase aggregate demand.

When Mexico suffered from capital flight in 1994, Mexico's net exports

increased.

People will want to hold more money if the price level

increases or if the interest rate decreases

Which of the following is included in the demand for loanable funds?

investment but not government borrowing The way we model things, the investment curve in the loanable-funds market represents demand only from private borrowers for loanable funds, not both private and public borrowers. Government borrowing actually is included in the public saving component of national saving; it is T - G. If public saving is negative, i.e., if T - G < 0, then it means that public saving, i.e., government saving, is technically government borrowing.

Alyssa is opening a bicycle shop, and her monthly expenditures to get the shop up and running exceed her monthly income. Alyssa is best described as a(n)

investor or demander of funds

U.S. net capital outflow

is a part of the demand for U.S. loanable funds, and the source of the supply of dollars in the foreign exchange market

When the economy is producing a quantity of real output greater than that indicated by the location of its long-run aggregate supply curve,

it is pushing some of its resources to operate beyond capacity.

Wages often don't fall as quickly as the price level does, a phenomenon referred to as "sticky wages". The main reason wages are sticky is because people's price-level expectations are themselves sticky — basically, people aren't immediately aware when the price level falls, and hence don't immediately downward-adjust their nominal wage demands when the price level does fall. This explanation puts the emphasis on people's awareness (or lack thereof). In addition, there are institutional factors which can contribute to the problem. That is, there are several institutional factors which can also cause wages to remain stuck at above-equilibrium levels in response to falling aggregate demand, rather than quickly adjusting downward, even after people have themselves become aware of the changed price level. Which of the following institutions would not contribute to this problem? That is, which of the following things does not interfere with downward wage flexibility?

laws which make hiring and firing employees easier The main explanation for sticky nominal wages is sticky price-level expectations. Nominal wages can be sticky for other reasons as well; (A), (B), and (C) here are three of the main other ones. That is, minimum wages, unions, and unemployment insurance are all things which make nominal wages less likely to adjust downwards (their effects are asymmetric in that they don't interfere with nominal wages' upward adjustment; in other words, nominal wages are likely to be stickier downward than up — itself an important point). In the case of minimum wages, such downward adjustment below a certain level is simply illegal; in the case of unions, there may be the threat of labor stoppages if management asks for nominal wage cuts; and in the case of unemployment insurance, its presence may make workers less fearful of losing their jobs if they aren't amenable to accepting pay cuts in order to keep them. Laws which make hiring and firing employees easier, by contrast, have the opposite effect as unemployment insurance — these tend to increase employee concerns about losing their jobs and make for a more compliant labor force. Hence (D) is the correct answer here.

Contractionary monetary policy

leads to disinflation and eventually makes the Phillips Curve shift left.

Wilma is considering expanding her dress shop and borrowing the funds to do it. If interest rates rise, she is

less likely to expand. This illustrates why the demand for loanable funds slopes downward.

Other things the same, a higher real interest rate raises the quantity of

loanable funds supplied. A higher (real) interest rate reduces the quantity of loanable funds demanded, so (C) is out. A higher interest rate also reduces net capital outflow; after all, as interest rate in a country increases, it makes savers want to move more funds into the country, not out, so (B) is out. Finally, domestic investment is the demand for loanable funds (part of it) so (A) is out for the same reason that (C) is out. This leaves (D).

The classical model is appropriate for analysis of the economy in the

long run, since real and nominal variables are essentially determined separately in the long run. By the classical model what is meant is the quantity equation MV = PY with V held fixed and with Y held fixed with respect to changes in M.

According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would

lower private saving and raise public saving. National saving is defined as S = (Y - C - T) + (T - G), where the first parenthesized term is private saving and the second is public saving. Expressed this way, it should be clear that if Y, C, and G remained constant, an increase in T would have to both reduce private saving and raise public saving. Overall national saving would remain unaffected. Note as an aside that the assumption of Y, C, and G remaining the same when T went up is an assumption which in the real world economists cannot make. That is, in the real world Y, C, and G are all affected by changes to T, which makes determining the final values of private saving, public saving, and national saving after a change to T much more difficult. Fortunately, in this problem we assume away such complications.

In essence, people can hold their wealth in just two forms, _____ and _____, or some combination thereof.

money; bonds

During recessions, automatic stabilizers tend to make the government's budget

move toward deficit

The value of net exports equals the value of

national saving minus domestic investment. There are many ways to solve this, but observe that in equilibrium in the open-economy loanable funds market it is the case that S = IW, where IW = I + NCO. That is, S = I + NCO or S - I = NCO. Recall however that NCO = NX. Thus by substitution we have S - I = NX.

An increase in the price level together with a reduction in real output would result from

natural disasters such as hurricanes, floods, and droughts.

An economy in which output has decreased and prices have increased would suggest the occurrence of a

negative supply shock

In the open-economy macroeconomic model, the supply of dollars in the U.S. market for currency exchange comes from U.S.

net capital outflow

In the open-economy macroeconomic model, if a country's interest rate falls, then its

net capital outflow and its net exports rise. As the U.S. interest rate falls, savers both domestic and foreign want to leave in or move in less funds to the U.S., on net. That is, U.S. net capital outflow goes up. Since the supply of USD in the market for currency exchange is U.S. net capital outflow, this means this supply curve shifts rightward. When this happens, it means a corresponding increase in the (quantity of) U.S. net exports.

. In the open-economy macroeconomic model, if the U.S. interest rate rises, then its

net capital outflow falls, so the supply of dollars in the market for currency exchange shifts left. As the U.S. interest rate rises, savers both domestic and foreign want to leave in or move in more funds to the U.S., on net. That is, U.S. net capital outflows go down. Since the supply of USD in the market for currency exchange is U.S. NCO, this means this supply curve shifts leftward.

If U.S. net exports are positive, then U.S.

net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.

At equilibrium in the open-economy loanable funds market, the amount that people want to save equals the desired quantity of

net capital outflow plus domestic investment. That is, when the open-economy loanable funds market is in equilibrium it is the case that S = IW, where IW = I + NCO. In the Mankiw text he simply defines I to be what is being written here as IW. That is, Mankiw simply writes off to the side in a note that the demand curve in the open economy loanable-funds market now includes NCO. I find it preferable to make this fact clearer, by explicitly defining the demand curve in the open-economy loanable funds market as IW = I + NCO. It is a pretty major detail, after all.

The linkage between the market for loanable funds and the market for foreign-currency exchange is

net capital outflow.

Suppose that because of legal and financial reforms in the country of Splat, foreigners find business opportunities there more attractive. We would expect the more attractive opportunities would cause Splat's

net exports and net capital outflow to decrease The legal and financial reforms decrease Splat's net capital outflows. That is, more funds now flow in than before, on net, as savers will have a more positive outlook on the situation in Splat. Net capital outflows in turn are equivalent to net exports, so the decline in NCO means NX declines as well.

If a country has positive net capital outflow, then

on net it is purchasing assets from abroad. This adds to its demand for domestic loanable funds.

The aggregate demand-aggregate supply model depicts the existence of monetary neutrality

only in the long run

Suppose short-term interest rates increase. The reason could be

open-market sales of U.S. Treasuries by the Fed, or a higher price level.

Other things the same, when interest rates rise,

people want to lend more, making the quantity of loanable funds supplied increase. This explains the shape of the supply curve in the loanable-fund market.

As the price level rises,

people will want to buy fewer bonds, so the interest rate rises.

If for a country it is the case that Y > C + I + G, then it has

positive net capital outflow and positive net exports. First, Y > C + I + G is equivalent to Y - (C + I + G) > 0. Next, one way of interpreting this inequality is as production - spending > 0. That is, if a country produces more stuff (Y) than it spends on stuff (C + I + G), then the excess has to go abroad; there is no other place for it to go. Hence, net exports must be positive; this rules out (B) and (D). Another way to understand this is to start with Y = C + I + G + NX → Y - (C + I + G) = NX. Hence, if Y - (C + I + G) > 0, then NX > 0. Y - (C + I + G) > 0 also means the country's income is greater than its spending, since Y is both national production and national income. If a country's income exceeds its spending then the excess has to go abroad; there is no other place for it. In other words, it is also the case that Y - (C + I + G) = NCO, meaning that if Y - (C + I + G) > 0, then NCO > 0. This rules out (C).

If a country exports more than it imports, then it has

positive net exports and positive net capital outflows. Remember NX = X - M and also NX = NCO.

For a closed economy, T = $5,000; S = $11,000; C = $50,000; and the government is running a budget deficit of $1,000. Then

private saving = $12,000 and GDP = $67,000. In a closed economy, S = I. This is because NCO = 0 in a closed economy, by definition (in an open economy we have S = I + NCO). Since S = Y - C - G = (Y - C - T) + (T - G), where (Y - C - T) equals private saving and (T - G) equals public saving, and since S = I it means (Y - C - T) + (T - G) = I. Plugging in the information we are told gives us two equations: (Y - 50,000 - 5000) + (5000 - G) = 11,000 and 5,000 - G = 1000. Solving the second equation for G gives G = $4000; plugging this back into the first equation and solving for Y gives Y = $67,000. Since only one answer choice features GDP of $67,000, you could actually stop here, but to find private saving itself, take (Y - C - T) and substitute the other information you know: 67,000 - 50,000 - 5000 = $12,000.

Other things the same, an increased government budget deficit will reduce

public saving, but not necessarily national saving. This question is surprisingly tricky. First, national saving S = (Y - C - T) + (T - G). The second term in parentheses is public saving, a.k.a., the government budget balance. If this term goes down, national saving may go down with it. The key word is "may" because things depend on why public saving went down in the first place. If the reason is that taxes (T) went down, then the decline in T both reduces public saving but also increase private saving by an equal amount, thereby having no net effect on national saving. On the other hand, if public saving decreased because government spending (G) increased, then that would reduce national saving. So altogether we cannot say for certain whether national saving will fall as a result of a fall in the government budget balance. (We can of course be certain that public saving fell, thus eliminating choices (B) and (D) from consideration.)

The country of Hogwarts is politically very stable and has a long tradition of respecting property rights. If several other neighboring countries suddenly became politically unstable, we would expect Hogwarts'

real exchange rate to rise In this situation Hogwarts would experience reverse capital flight as savers rushed to move their funds away from the other now-unstable countries and into Hogwarts. This would have effects on all three panels of the three-panel diagram, but the effect relevant here for answering this question is that in Hogwarts' market for currency exchange the net capital outflow curve would shift inward. This would reduce the equilibrium quantity of Hogwartian net capital outflows (i.e., the equilibrium quantity of Hogwartian currency supplied — call this the Potter), as well as would reduce the equilibrium quantity of Hogwartian net exports (i.e., the equilibrium quantity of Potters demanded). More importantly, this would also increase the equilibrium Hogwartian real exchange rate.

In the open-economy macroeconomic model, the key determinant of net capital outflow is the

real interest rate.

In the early 1970s, the U.S. Phillips Curve shifted

right as inflation expectations rose.

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

rises and the quantity of dollars traded falls.

A bond buyer is a

saver. Bond are certificates of indebtedness — instruments of debt finance.

If a country has a trade surplus, then its

saving is greater than domestic investment and Y > C + I + G. If a country has a trade surplus, it means NX > 0. In turn, NX = Y - (C + I + G), so if NX > 0, it means Y - (C + I + G) > 0, or Y > C + I + G. This eliminates (B) and (D). Regarding (A) versus (C), Y > C + I + G can be arranged as Y - C - G > I, and the LHS of this is equivalent to national saving, so we have S > I. Hence the correct answer is (A).

The source of the supply of loanable funds is

saving, and the source of the demand for loanable funds is investment. In other words, the place where lenders and borrowers (i.e., savers and investors) get together is the market for loanable funds. Note that by "borrowers" we mean people who receive loanable funds; those transactions might technically be structured as equity transactions (e.g., stock sales) rather than debt transactions (e.g., bond sales) but in the interest of generality we call them all "borrowing" (or demanding, or investing — as always in economics we face the problem of too many synonyms).

When a large, well-known corporation wishes to borrow directly from the public, it can

sell bonds

Suppose price-level expectations increase; that is, suppose the public expects higher price levels. On the Phillips Curve graph, the Phillips Curve itself will

shift outward, but the long-run Phillips Curve will remain stationary.

Most economists use the aggregate supplyaggregate demand (AS-AD) model primarily to analyze

short-run fluctuations in the economy Although the AS-AD model also represents the long run (there is a long-run aggregate supply curve) it is primarily used for representing short-run fluctuations in the economy. To represent long-run changes in aggregate supply (i.e., economic growth), there is a whole class of growth models.

. In 1979, Fed chair Paul Volcker decided to pursue a policy

that would lead to disinflation

During wars, government spending is larger than normal. More government spending means a higher price level, and higher price levels mean higher money demand, which in turn means higher interest rates. Higher interest rates are bad because they choke off investment spending. To reduce these effects on interest rates,

the Federal Reserve could increase the money supply by buying bonds

If nominal wages are sticky and the price level is greater than what was expected, then

the amount of products and services supplied rises. This is shown in the AS-AD model by a movement rightward and upward along the short-run aggregate supply curve. First, the real wage = w/P, where w is the nominal wage and P is the price level. The nominal wage in turn is a function of price-level expectations, w = f(E(P)), meaning that if price-level expectations don't change, neither will the nominal wage. But that's just the point: when the price level increases, price-level expectations do not change together with it, at least not at first, meaning w does not change, either. Hence the effect on the real wage of an increase in P is for the real wage to fall. Finally, paying lower real wages means firms can supply greater quantities of real output. Altogether: a positive relationship between the price level and the aggregate quantity of real output supplied, at least in the short run.

In macroeconomics, the long run refers to

the amount of time it takes for prices of inputs to fully adjust to changes in economic conditions (most especially, changes in the price level)

The government builds a new water-treatment plant. The owner of the company that built the plant pays his workers. The workers increase their spending. Firms from which the workers buy goods increase their spending. And so on. This overall pattern is called

the multiplier effect

In the language of macroeconomics, investment refers to

the purchase of new capital.

The term crowding-out refers to

the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

the short run, but not the long run.

. An increase in the expected price level shifts the

the short-run, but not the long-run, aggregate supply curve left.

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate demand curve.

In the open-economy macroeconomic model, if the supply of loanable funds shifts right, then

the supply of dollars in the market for currency exchange shifts right. The increase in savings in the market for loanable funds reduces the interest rate. The lower interest rate in turn means an increase in net capital outflow — savers want to move their funds to another country where interest rates are now relatively higher. The increase in net capital outflow in turn means an outward (rightward) shift of the supply curve in the market for currency exchange.

If U.S. net capital outflow increases then

the supply of dollars in the market for currency exchange shifts right. The source of supply of currency in the market for currency exchange is net capital outflows. Hence when there is an increase in U.S. NCO, it means there is an increase in the supply of USD, which in turn is depicted as a rightward shift of the NCO curve in the U.S. market for currency exchange.

The primary argument against active (i.e., discretionary) fiscal policy is that

these policies affect the economy with a long lag

The Phillips Curve shows the combinations of

unemployment and inflation that result as the aggregate demand curve shifts upward along the short-run aggregate supply curve in the AS-AD model.