Updated Unit 3

Question 1

Aggregate Demand (definition)

Answer 1

all the goods and services that consumers, firms, and governments are willing and able to purchase at various price levels.

Question 2

Reasons/effects the AD curve is downward sloping (3)

Answer 2

1. Wealth Effect
2. Interest Rate Effect
3. Foreign Trade Effect

Question 3

What happens to the aggregate real GDP when prices increase

Answer 3

decreases

Question 4

Shifters of AD (4)

Answer 4

1. Consumer Spending
2. Investment spending
3. Govt. spending
4. Net Exports

Question 5

What is the relationship between the price level and Real GDP?

Answer 5

Inverse

Question 6

Is a change in price a movement along the curve or a shift of the curve?

Answer 6

movement along the curve

Question 7

multiplier effect (def)

Answer 7

idea that an initial change in spending will set off a spending chain that is magnified in the economy. (velocity of money)

Question 8

MPC (Def)

Answer 8

How much people consume rather than save when there is a change in income

Question 9

MPS (def)

Answer 9

How much people save rather than consume when there is a change in income.

Question 10

MPC Formula

Answer 10

change in consumer spending/
change in income

Question 11

MPS Formula

Answer 11

change in savings/
change in income

Question 12

spending multiplier formula

Answer 12

1/ 1/
MPS or 1-MPC

Question 13

tax multiplier def

Answer 13

determines the maximum change in spending when the government either increases or decreases taxes

Question 14

tax multiplier formula

Answer 14

-MPC/
MPS

Question 15

what is the relationship between the MPC and the size of the spending multiplier?

Answer 15

the higher the MPC, the larger the spending multiplier

Question 16

Short run aggregate supply

Answer 16

wages are sticky in the short run

Question 17

shifters of SRAS (3)

Answer 17

1. Resource price/availability
2. Actions of the govt.
3. Productivity

Question 18

Long run aggregate supply

Answer 18

In the long run, wages and resources prices are flexible.

Question 19

when is the LRAS curve vertical on the graph?

Answer 19

at full employment

Question 20

Shifters of LRAS (3)

Answer 20

1. size of workforce
2. number of land resources available
3. capital stock

Question 21

when does Short-run aggregate equilibrium occur?

Answer 21

when the quantity of aggregate demanded is equal to the quantity of aggregate supply

Question 22

when does Long-run equilibrium occur?

Answer 22

when the current output is also equal to potential output.

Question 23

when do you have a surplus in GDP (graphically)

Answer 23

If the price level increases above equilibrium

Question 24

when do you have a shortage in GDP (graphically)

Answer 24

If the price level decreases below equilibrium

Question 25

Inflationary gap

Answer 25

an economy is producing a short-run Real GDP output that is beyond its potential Real GDP output at full employment

Question 26

recessionary gap

Answer 26

an economy is producing a short-run Real GDP output that is less than its potential Real GDP at full employment.

Question 27

expansionary fiscal policy

Answer 27

laws that increase output by either increasing government spending or decreasing taxes.

Question 28

contractionary fiscal policy

Answer 28

laws that decrease inflation by decreasing government spending or increasing taxes.