Econ 203 EXAM 3

Question 1

📘 ECONOMICS EXAM STUDY GUIDE

Question 2

1. Real GDP vs. Savings and Consumption (Graphs)

Question 3

Understand: How changes in consumption and savings affect Real GDP.

Question 4

Key concept: A change in taxes affects disposable income → shifts consumption/savings → affects GDP.

Question 5

2. Shifts in Consumption Schedule

Question 6

Upward Shift Causes: Increase in wealth

Answer 6

expectations of higher future income

Question 7

Know: What does not cause an upward shift (MC question).

Question 8

3. APC & APS (Average Propensity to Consume/Save)

Question 9

Upward shift in savings:

Question 10

APC decreases

Answer 10

because less of income is spent.

Question 11

APS increases

Answer 11

because more is saved.

Question 13

💼 Investment and Business Behavior

Question 14

4. Investment-Demand Curve

Question 15

Optimistic businesses: Shift investment-demand curve to the right.

Question 16

Technological progress: Also shifts investment-demand curve to the right.

Question 17

5. Business Taxes + Real Interest Rate

Question 18

Lower business taxes: Encourage investment → shift demand curve right.

Question 19

Higher interest rates: Discourage investment → shift demand curve left.

Question 20

6. Variability of Business Profits (Definition)

Question 21

Refers to fluctuations in the profits businesses earn over time—affects willingness to invest.

Question 23

🏦 Interest Rates & Consumer Behavior

Question 24

7. Lower Real Interest Rate:

Question 25

Induces consumers to borrow and spend more → increases consumption.

Question 27

📊 Tables: MPC and Income Analysis

Question 28

8. Marginal Propensity to Consume (MPC)

Question 29

Formula: ΔConsumption / ΔIncome

Question 30

You’ll be given a table → Calculate the change between two income levels.

Question 31

9. Identifying Activity at Income Level

Question 32

Use table to tell if:

Question 33

There’s saving or dissaving

Question 34

Equilibrium level of income is reached

Question 36

📈 Aggregate Supply & Demand

Question 37

10. Consumption Schedule (Definition)

Question 38

A schedule showing how much households plan to consume at different income levels.

Question 39

11. Aggregate Supply (AS) and Demand (AD) Curves

Question 40

AS Curve (Short-Run): Upward-sloping (prices flexible

Answer 40

input prices fixed)

Question 41

AS Curve (Long-Run): Vertical (full employment output)

Question 42

AD Curve: Downward-sloping (real balances

Answer 42

interest rate

Question 43

12. Real-Balances Effect

Question 44

Higher price level → lower real value of money → less consumption → lower AD.

Question 45

13. Foreign Purchases Effect

Question 46

Higher domestic prices → foreigners buy less of our goods → lower net exports → AD shifts left.

Question 47

14. Short-Run AS Curve Assumptions

Question 48

Input prices fixed

Answer 48

output prices flexible → curve is horizontal (immediate short-run).

Question 49

15. Price Level Increases - Know the Effects

Question 50

Be able to pick out the option that does not happen (common MC format).

Question 52

💰 Fiscal Policy & Government Intervention

Question 53

16. Contractionary vs. Expansionary Fiscal Policy

Question 54

Expansionary: ↑ gov. spending or ↓ taxes → to fight recession

Question 55

Contractionary: ↓ gov. spending or ↑ taxes → to reduce inflation

Question 56

17. Demand-Pull Inflation

Question 57

Too much demand → pulls prices up.

Question 58

18. Multiplier Formula Question

Question 59

Formula: Multiplier = 1 / (1 - MPC)

Question 60

Example: MPC = 0.5 → Multiplier = 2

Question 61

GDP gap = -$100B → Gov. should spend $50B to close it (because 2 × $50B = $100B)

Question 62

19. Discretionary Fiscal Policy

Question 63

Initiated by Congress

Question 64

“Discretionary” = actively chosen policies (not automatic stabilizers)

Question 65

20. Budget Surplus (Definition)

Question 66

When government revenue > government spending

Question 67

21. Fiscal Policy (Definition)

Question 68

Use of government spending and taxation to influence the economy.

Question 70

📉 Graph Scenarios: Spending & Output

Question 71

22. AD-AS Graphing Questions

Question 72

Effects of:

Question 73

Tax increases

Question 74

Government spending cuts

Question 75

How they shift AD left → lowers GDP and price level.

Question 76

23. Business + Government Spending Changes

Question 77

Both increasing spending: AD shifts right.

Question 78

Both decreasing spending: AD shifts left.