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Macro > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

Interest rate effect

A

When price levels increase, people would spend less and save more which decreases GDP

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2
Q

Wealth effect/real balance effect

A

When price levels increase, people feel less wealthy and so they save more, decreasing GDP

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3
Q

Net export/ foreign exchange effect

A

When the price levels increase, net exports decrease and GDP decreases s

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4
Q

What are the reasons why the aggregate demand curve slopes downward

A

Interest rate effect, wealth effect/real balance effect, net export/foreign exchange effect

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5
Q

Draw an Investment demand curve

A

-

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6
Q

Draw a short-run Phillips curve

A

-

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7
Q

Draw an aggregate supple/demand curve

A

-

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8
Q

Draw a Keynesian aggregate supply curve

A

-

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9
Q

Draw & label a Keynesian aggregate supply curve

A

-

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10
Q
A
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11
Q

Draw a loanable funds market curve

A

-

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12
Q

Loanable funds market

A

Private sector for loans `

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13
Q

Shifters of aggregate supply

A

IRAP
I - change in inflationary expectations
R - change in resource prices
A - change in actions of the government
P - change in productivity

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14
Q

SRAS vs LRAS

A

In SRAS wages & resource prices will not increase as price levels increase bc they are sticky.
In LRAS wages & resource prices will increase as price levels increase bc they are flexible.

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15
Q

Loanable funds market demand shifters

A
  1. Changes in perceived business opportunities
  2. Changes in government borrowing (budget deficit/surplus)
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16
Q

Loanable funds market supply shifters

A
  1. Changes in private savings behavior
  2. Changes in public savings
  3. Changes in foreign investment
  4. Changes in expected profitability
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17
Q

Shifters of LRAS

A

Availability of resources
Population
Technology
Policies affecting the natural rate of unemployment

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18
Q

Stagflation

A

Prices are high & unemployment is high

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19
Q

Draw a graph demonstrating stagflation

A

-

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20
Q

Inflation means workers seek….

A

Higher wages

And so production costs increase

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21
Q

MPC =

A

Change in consumption/change in disposable income

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22
Q

MPS =

A

Change in savings / change in disposable income

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23
Q

Multiplier =

A

1/(1-MPC) or 1/MPS

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24
Q

MPS + MPC =

A

1

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25
Q

Tax multiplier =

A

-MPC/MPS

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26
Q

Total change in GDP =

A

Multiplier x initial change in spending

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27
Q

Initial Change in spending =

A

Total change in GDP/multiplier

28
Q

Monetary policy

A

Action by the federal reserve bank to stabilize the economy

29
Q

Fiscal policy

A

Actions by congress to stabilize the economy

30
Q

Examples of fiscal policy

A

Taxes, government transfers, purchase of goods

31
Q

Contractionary fiscal policy: reason & examples

A

To reduce inflation & decrease GDP
-decrease government spending
-tax increases (decreasing disposable income)
-combination of the two

32
Q

Expansionary fiscal policy: reason & examples

A

To reduce unemployment & increase GDP (close a recessionary gap)
-increase government spending
-decrease taxes
-combination

33
Q

Discretionary fiscal policy

A

Congress creates a new bill that changes AD through government spending or taxation

34
Q

Problems with discretionary fiscal policy

A

Time lags due to bureaucracy
Takes time for congress to act

35
Q

non-discretionary fiscal policy

A

Automatic stabilizers. Permanent spending or taxation laws to stabilize the economy

36
Q

Examples of non-discretionary fiscal policy

A

Welfare, unemployment, minimum wage

37
Q

US progressive income tax system

A

When GDP is down, the tax burden on consumers is low, promoting consumption, increasing AD (vice-versa)

38
Q

The more progressive the tax system…

A

The greater the economy’s built-in stability

39
Q

When price level decreases, real wages ______ because _______

A

Increase because the money has more purchasing power

40
Q

When price level increases, interest rates _______

A

Rise

41
Q

Which is less efficient: decreasing taxes or government spending & why

A

Decreasing taxes because people will save taxes (MPS)

42
Q

Budget balance =

A

Sgov = T - G - TR

Budget balance = tax revenue - government purchases - transfers

43
Q

Problems with fiscal policy (5)

A
  1. Budget deficit - when we have a recessionary gap & we combine more government spending & tax cuts, we have deficit spending
  2. Time lags
  3. Politically motivated policies - politicians may use economically inappropriate policies to get reelected (promising more welfare & programs when there is already an inflation)
  4. Crowding out effect - government spending might cause unintended effects that weaken the impact of policy
  5. Net export effect - international trade reduces the effectiveness of fiscal policies (we have a recessionary gap so gov. Spends more to increase AD. Increase in AD causes an increase in price level, so U.S. goods seem more expensive to foreign ppl, decreasing AD.
44
Q

Implicit liabilities

A

Social security, demographics, Medicare,, Medicaid

45
Q

What has a greater impact on the budget balance: tax revenue, government purchases, or government transfers

A

Government purchases

46
Q

Recognition lag

A

Congress must react to economic indicators before it’s too late

47
Q

Administrative lag

A

Congress takes time to pass legislation

48
Q

Operational lag

A

Spending/planning takes time to organize & execute

49
Q

Give an example of the crowding-out effect

A
  1. Gov creates a new library (AD increases), now consumers spend less on books (AD decreases)
  2. Gov increases spending but must borrow the money (AD increases), this increases the interest rate so there is less investment (AD decreases)
50
Q

Balance budget multiplier

A

Assuming spending increases are equal to tax increases, the multiplier is 1

51
Q

Leakages

A

The withdrawal of funds from an economy’s circular flow. Main types of leakages are savings, taxes, and imports. They slow the multiplier effect

52
Q

Main types of leakages

A

Savings, imports, and taxes

53
Q

Injections

A

The input of funds into an economy’s circular flow. The main types of injections are government spending, exports, and investment. Injections have a positive multiplier

54
Q

Main types of injections

A

Government spending, exports, investment

55
Q

Effect of leakages on the multiplier

A

Slow the multiplier effect

56
Q

Effect of injections on the multiplier

A

Have a positive multiplier

57
Q

Planned investment spending

A

The investment that businesses intend to undertake

58
Q

Unplanned inventory

A

Occurs when sales are less than expected for businesses. unsold goods end up as unplanned inventory

59
Q

Inventory investment

A

The value of the change in inventory in an economy in a given year

60
Q

Actual investment

A

Planned investment spending + unplanned inventory investment

61
Q

Draw an aggregate consumption function

A

-

62
Q

Consumption function equation

A

C= a+b(yd)
C = base level of consumption + MPC(disposable income)

63
Q

Savings function equation

A

S= -a + (1-b)(yd)
S = base + (1-MPC)(disposable income)

64
Q

When inflation rises, interest rates ___

A

Rise

65
Q
A

Macro (2 decks)

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