chapter 7

Question 1

real gdp graph includes

Answer 1

1. peak
2. trough
   3.expansion
3. peak
4. trough
5. expansion

Question 2

what does aggregate demand impact

Answer 2

1. employment
2. prices

Question 3

2 main phases of economic cycle

Answer 3

1. growth/expansion
2. recession/ contraction

Question 4

characteristics of recessions

Answer 4

1. investment falls
2. consumer purchase decrease
3. employment falls
4. business profit falls

Question 5

when do we know we are in a recession

Answer 5

when gdp falls for 2 quarters in a row (6 months)

Question 6

what is the recession cycle

Answer 6

sales fall-> production falls->employment falls-> income falls-> sales fall

Question 7

what is the recover cycle

Answer 7

sales rise-> production rise-> employment rises-> income rises-> sales rise

Question 8

what happens in recession

Answer 8

production decreases so inflation decreases demand for raw materials decrease so business profits decrease

Question 9

how to reserve banks intervene during recession

Answer 9

by trying to stimulate the economy through more money supply and less interest rates

Question 10

business cycle theories

Answer 10

1. exogenous theories
2. endogenous theories

Question 11

what is exogenous theories

Answer 11

external factors (war, oil, prices)

Question 12

what is endogenous theories

Answer 12

internal factors (financial crisis)

Question 13

what is aggregate demand

Answer 13

total quantity of output people are willing to buy at a given price level

Question 14

components of aggregate demand

Answer 14

1. consumption
2. investment
3. government spending
4. net exports

Question 15

what does consumption include

Answer 15

1. income
2. wealth
3. future expectations

Question 16

what does investment include

Answer 16

1. cost of capital
2. revenue/profit
3. future expectations

Question 17

what does net exports include

Answer 17

exports and imports (xm)

Question 18

what happens to real gdp when price increases

Answer 18

decreases

Question 19

what happens to real GDP when price decreases

Answer 19

increases

Question 20

how are the 4 components shown in the graph of aggregate demand

Answer 20

horizontal arrows that make up real gdp

Question 21

reasons for shifts in AD curve

Answer 21

1. increase in money supply
2. change in tax policy
3. increase in government spending

Question 22

what happens when price level increases and income stays the same

Answer 22

real disposable income decreases, interest rates increase, loans are more expensive. investment and consumption will decrease

Question 23

what does aggregate mean

Answer 23

overall

Question 24

demand curve at micro level

Answer 24

when price increases quantity demanded decreases because of substitution effect

Question 25

what impacts aggregate demand

Answer 25

1. policy variables 2. exogenous variables

Question 26

what are policy variables

Answer 26

1. monetary policy (interest rate) 2. fiscal policy (tax)

Question 27

what are exogenous variables

Answer 27

1. foreign output 2.asset values 3. advances in technology

Question 28

what happens when stock market increases

Answer 28

consumer wealth increases, consumption increases, cost of capital decreases, business investment increases

Question 29

what is the multiplier

Answer 29

explains how a $1 change in spending will lead to a more than $1 change in gdp

Question 30

what does the multiplier assume

Answer 30

1. fixed wages 2. unemployed resources 3. monetary policies don’t interfere

Question 31

features of the level of consumption graph

Answer 31

-45° line is where gdp can equal consumption -C line is consumption behavior -where actual C line and 45° intervene is the point where actual consumption=gdp. any other point shows disequilibrium

Question 32

how to get planned saving

Answer 32

level of gdp-planned consumption

Question 33

how to calculate multiplier

Answer 33

1/1-mpc OR 1/mps

Question 33

if total expenditure is less than gdp

Answer 33

output>spending. firms decrease production

Question 33

how to calculate total spending/growth

Answer 33

multiplier times initial investment

Question 33

how to calculate multiplier effect

Answer 33

total change in gdp/initial injection

Question 33

if total expenditure is higher than gdp

Answer 33

spending>output. firms increase production

Question 34

impact of 2 fiscal policy tools on economy

Answer 34

1. government spending. when government spending increases overall output increases 2. tax change+output. has smaller effect

Question 35

how to calculate tax multiplier

Answer 35

mpc times expenditure multiplier

Question 35

the bigger the mps the bigger the

Answer 35

multiplier