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
