exam 2

Question 1

average propensity to consume (apc)

Answer 1

spending/earning
APC + APS = 1

Question 2

average propensity to save (aps)

Answer 2

money left after spending/earnings
APC + APS = 1

Question 3

marginal propensity to consume (MPC)

Answer 3

change in consumption/
change in income
function of income
slope in AE model

Question 4

marginal propensity to save (MPS)

Answer 4

change in savings/
change in income

Question 5

investment

Answer 5

investment (multiplier) + income = new income with investment
straight horizontal line as a function on income on AE graph

Question 6

multiplier equation

Answer 6

1/(1-MPC)
how spending has ripple effects in the economy

Question 7

Simple AE Model

Answer 7

C + I + G + NX
AE (consumption) as a function of income
AE = Y (equilibrium where C+I = AE =Y)
Consumption curve
C+I
Savings and Investment
(Net Exports, Government spending, and Taxes can be added)
investment as a function of income + savings as a function of income
equilibrium: savings = withdrawals

Question 8

paradox of thrift

Answer 8

savings is a withdrawal from the economy, this it reduces the economy ie. the economy crashed during covid bc consumption was so reduced

Question 9

The Wealth Effect

Answer 9

higher price level causes the purchasing power of citizens savings to reduce

Question 10

Interest Rate Effect

Answer 10

higher price levels make it harder to save, savings fall and interest rates rise, making it harder to take loans and reduces AD

Question 11

Aggregate Demand curve

Answer 11

C+ I + G + NX = AD Curve
output of goods and services (real GDP) demanded at different price levels
- shifts left or right according to consumer demand

Question 12

Export Effect

Answer 12

higher price level causes goods to be more expensive, reducing exports and AD

Question 13

disposable income

Answer 13

income - taxation

Question 14

equilibrium

Answer 14

savings + taxation = investment + gov spending

Question 15

Aggregate Supply Curve

Answer 15

shows the real GDP that firms will produce at varying price levels

Question 16

Long Run Aggregate Supply

Answer 16

slope: vertical since its driven by the natural rate of output
- right shifts occurs when tech and/or labor is improved, and/or trade and globalization increase
-prices are fully flexible

Question 17

Short Run Aggregate Supply

Answer 17

• prices not fully flexible, incentive to produce is reduced if inputs (materials needed to produce) catch up to outputs ($ made)

Question 18

lags

Answer 18

time it takes for an economic issue to be recognized and addressed, before which it may correct itself

Question 19

informational lag

Answer 19

Most data that policymakers need are not available until at least one quarter after the fact

Question 20

recognition lag

Answer 20

It takes time to recognize trends in the data

Question 21

decision lag

Answer 21

Policies must be debated and passed in Congress and signed by the president

Question 22

implementation lag

Answer 22

Once a policy becomes law, it takes time to plan,
budget, and implement the new program

Question 23

crowding out effect

Answer 23

Gov. spends money, increasing gov. debt, increasing interest rates and making loans inaccessible

Question 24

deficit

Answer 24

difference between gov. spending and revenue per period
tax revenue < spending

Question 25

surplus

Answer 25

revenue > spending

Question 26

debt

Answer 26

aggregate measure of deficit/surplus over time

Question 27

intra-government debt

Answer 27

debt financed within government agency

Question 28

public debt

Answer 28

non intra-gov debt financed by treasury bonds (with interest)

Question 29

Balanced Budget Rule

Answer 29

budget with no deficit

Question 30

Cyclically Balanced Budget

Answer 30

deficits are offset by surplus during market boom

Question 31

Functional Finance Strategy

Answer 31

promotes economic growth and allow for tax increases

Question 32

Keynesian Economics

Answer 32

economic theory formed after the Great Depression with new understanding that prices and wages are slow to adjust and the need for government intervention in the economy

Question 33

automatic stabilizers

Answer 33

TAX REVENUES AND TRANSFER PAYMENTS AUTOMATICALLY ADJUST TO ECONOMIC FLUCTUATIONS WITHOUT ACTION BY CONGRESS

Question 34

supply side fiscal policy

Answer 34

targets the supply side to promote growth, reduce unemployment, and stabilize prices. It is designed to shift the long-run aggregate supply curve to the right. It does not always require a tradeoff between price levels and output. It requires more time to work than demand-side policy. ex: Spending on infrastructure, education, and technology Reducing tax rates Expanding investment and reducing regulations

Question 35

discretionary spending

Answer 35

spending that works through the appropriations process each year, not fixed national defense, transportation, education, science, environmental protection

Question 36

mandatory spending

Answer 36

spending required by law, can only be changed by changing the law social security, medicare, interest on national debt

Question 37

expansionary fiscal policy

Answer 37

reduction in taxes or increased spending to increase aggregate demand and output

Question 38

contractionary fiscal policy

Answer 38

increased taxes or decreased spending to reduce inflation

Question 39

stagflation (AS negative shock

Answer 39

AS shift left increased unemployment increased price levels decreased output decreased wages self correcting -> decreased wages decrease price levels

Question 40

AS positive shock

Answer 40

AS curve shifts right increased supply + decreased price level = increased output causes inflation

Question 41

recession (AD negative shock)

Answer 41

AD curve shift left corrected by SRAS shift right - lower price level increases production or AD is increased through reduced taxes or gov spending

Question 42

economic boom (AD positive shock

Answer 42

AD curve shift right

Question 43

demand-pull inflation

Answer 43

high demand increases price levels, pushes economy past full employment levels

Question 44

cost-push inflation

Answer 44

negative supply shock reduces output and raises prices

Question 45

government budget constraint

Answer 45

G – T = ΔB + ΔM + ΔA B = change in bonds held by the public

Question 46

US National Debt

Answer 46

~35 trillion, 130% of GDP ~28 trillion in public debt, 95% of GDP

Question 47

social security

Answer 47

working individuals are taxed on their income, which is then saved into a fund that makes social security payments for elderly people. the earliest someone can begin receiving payment is 62

Question 48

types of taxes

Answer 48

payroll, corporate, individual income, goods