Exam 3

Question 1

In the short run, how will wages and resources respond to a price increase

Answer 1

They will not increase as price levels increase

Question 2

In the long run, how will wages and resources respond to a price increase

Answer 2

They will increase as price levels increase

Question 3

Shifters of AD

Answer 3

Consumer spendingInvestment spendingGovernment spendingNet Exports

Question 4

Shifters of AS

Answer 4

Inflationary expectationsResource pricesGovernment actions (taxes, subsidies, regulations)Productivity

Question 5

Discretionary fiscal policy

Answer 5

Congress creates a new bill that is designed to change AD through government spending or taxation

Question 6

Non-Discretionary fiscal polict

Answer 6

Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

Question 7

Expansionary fiscal policy

Answer 7

Laws to increase output

Question 8

Expansionary fiscal policy examples

Answer 8

Increase government spending and decrease taxes (increases disposable income)

Question 9

Contractionary fiscal policy

Answer 9

Laws to reduce inflation

Question 10

Contractionary fiscal policy examples

Answer 10

Decrease government spending and increase taxes (decreases disposable income)

Question 11

Deficit spending

Answer 11

If the government increases spending without increasing taxes they will increase the annual deficit and national debt

Question 12

Time lags

Answer 12

Congress takes time to write, debate, pass, and implement legislation

Question 13

Crowding out

Answer 13

Government spending might cause unintended effects that weaken the impact of the policy. Ex: deficit spending to increase AD would increase interest rates and decrease investment

Question 14

Three functions of money

Answer 14

A medium of exchangeA unit of accountA store of value

Question 15

A medium of exchange

Answer 15

Money can easily be used to buy goods and services with no complications of a barter system

Question 16

A unit of account

Answer 16

Money measures the value of all goods and services. Money acts as a measurement of value

Question 17

A store of value

Answer 17

Money allows you to store purchasing power for the future

Question 18

Commodity money

Answer 18

Something that performs the function of money and has alternative uses (cigarettes in prison)

Question 19

Fiat money

Answer 19

Something that serves as money but has no other important uses ($20 bill)

Question 20

Shifters of money demand (Dm)

Answer 20

Changes in price levelChanges in incomeChanges in taxation that affects personal investment

Question 21

Changes in price level

Answer 21

Inflation requires the consumer to hold more cash for financial transactions

Question 22

Changes in income

Answer 22

Sustained economic growth in the economy leads to more employment and increase in the demand for money

Question 23

Changes in taxation that affects personal investment

Answer 23

Government policies such as changing the capital gains tax would change the demand for money

Question 24

Shifters of the money supply

Answer 24

Change in reserve ratioChange in the discount rateChange in the discount rate

Question 25

Change in reserve ratio

Answer 25

To increase the money supply, decrease the reserve ratioTo decrease the money supply, increase the reserve ratio

Question 26

Change in the discount rate

Answer 26

To increase the money supply, decrease the discount rateTo decrease the money supply, increase the discount rate

Question 27

Change in the discount rate

Answer 27

To increase the money supply, the FED buys bondsTo increase the money supply, the FED sells bonds

Question 28

Federal Funds Rate

Answer 28

The interest rate that banks charge one another for one-day loans of reserves

Question 29

Supply shock

Answer 29

An event that affects aggregate supply Drought, hurricane, oil shock

Question 30

Stagflation

Answer 30

persistent high inflation combined with high unemployment and stagnant demand in a country's economy. Caused by a negative supply shock

Question 31

Autonomous Consumption

Answer 31

the minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities.

Question 32

Classical Economic Theory

Answer 32

Hands off; let the market decide

Question 33

Keynesian economic theory

Answer 33

Govt involvement (inc/dec taxes, etc)

Question 34

Spending multiplier equation

Answer 34

1/1-mpc or 1/mps

Question 35

If LRAS shifts, what else shifts

Answer 35

LRPC

Question 36

If AS shifts right...

Answer 36

Shift the SRPC to the left

Question 37

If AD shifts...

Answer 37

Move along the SRPC