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Macroeconomics Unit3
Macroeconomics Unit 3
| Question | Answer |
|---|---|
| What does Aggregate Demand (AD) represent? | A: The total demand for all goods and services in an economy at different price levels. |
| Who makes up aggregate demand? | A: Consumers, businesses, the government, and foreign buyers. |
| What is the relationship between price level and real GDP on the AD curve? | A: Inverse relationship — as price level rises, real GDP demanded falls. |
| Why is the Aggregate Demand curve downward sloping? | A: Because of the wealth effect, interest rate effect, and foreign trade effect. |
| What happens to purchasing power when the price level increases? | A: Purchasing power decreases. |
| What is the wealth effect? | A: Higher price levels reduce the purchasing power of money, decreasing consumer spending. |
| What is the interest rate effect? | A: Higher price levels lead to higher interest rates, reducing investment and consumption. |
| What is the foreign trade effect? | A: Higher domestic prices make exports more expensive and imports cheaper, reducing net exports. |
| What causes Aggregate Demand to shift? | A: Changes in consumer spending, investment spending, government spending, or exports. |
| Does a change in price level shift AD? | A: No it causes movement along the AD curve, not a shift. |
| Aggregate Demand | All goods and services buyers are willing to purchase at different price levels |
| Price Level | The average of all prices in the economy. |
| Real GDP | The value of final goods and services produced, adjusted for inflation. |
| Wealth Effect | When higher prices reduce the real value of money, lowering consumer spending. |
| Interest Rate Effect | Rising prices increase interest rates, reducing borrowing and spending. |
| Foreign Trade Effect | Changes in exports and imports caused by relative price changes between countries. |
| Consumer Spending (C) | Spending by households on goods and services. |
| Investment Spending (I) | Spending by businesses on capital goods. |
| Government Spending (G) | Spending by the government on goods and services. |
| Net Exports (Xn) | Exports minus imports. |
| Increase in price level | Decrease in real GDP demanded. |
| Increase in consumer spending | AD shifts right. |
| Decrease in investment spending | AD shifts left. |
| Increase in government spending | AD shifts right. |
| Increase in exports | AD shifts right. |
| Higher U.S. price levels | Exports fall, imports rise → AD shifts left. |
| Lower interest rates | Borrowing and spending increase → AD shifts right. |
| Aggregate Supply (AS) | Total amount of goods and services firms are willing and able to produce in an economy at different price levels. |
| Short-Run Aggregate Supply (SRAS) | Aggregate supply in the short run when resource prices, especially wages, are sticky and do not change quickly. |
| What does aggregate supply measure? | The total output of goods and services firms produce at different price levels. |
| Why does the short-run aggregate supply curve slope upward? | Because wages and other resource prices are sticky and do not adjust immediately. |
| Sticky Wages | Wages that do not respond quickly to changes in the price level. |
| What does it mean when wages are sticky? | They do not adjust quickly to inflation or deflation. |
| Long-Run Aggregate Supply (LRAS) | Aggregate supply in the long run when resource prices are flexible and fully adjust to changes in the price level. |
| Why is the long-run aggregate supply curve vertical? | Because wages and prices are flexible and output depends on resources and technology, not price level. |
| Short-Run Business Response to Higher Prices | In the short run, firms increase output when prices rise because production becomes more profitable. |
| Why do firms produce more when prices rise in the short run? | Higher prices increase profits while wages remain temporarily fixed. |
| Shifters of Aggregate Supply | Factors that cause the aggregate supply curve to shift left or right. |
| What factors shift aggregate supply? | Resource prices, supply shocks, expectations, taxes, subsidies, regulations, and productivity. |
| Changes in Resource Prices | Changes in the cost of domestic or imported inputs used in production. |
| How do higher resource prices affect aggregate supply? | They increase production costs and shift aggregate supply left. |
| Supply Shocks | Sudden and unexpected events that affect production costs. |
| What is a supply shock? | An unexpected event that raises or lowers production costs and shifts aggregate supply. |
| Inflationary Expectations | Expectations of higher future prices that lead workers to demand higher wages. |
| How do inflationary expectations affect aggregate supply? | Higher expected inflation increases wages and costs, shifting aggregate supply left. |
| Taxes on Producers | Government taxes imposed on firms. |
| How do taxes on producers affect aggregate supply? | They increase production costs and decrease aggregate supply. |
| Subsidies | Government payments that reduce production costs for firms. |
| How do subsidies affect aggregate supply? | They lower costs and shift aggregate supply right. |
| Government Regulations | Rules and requirements firms must follow during production. |
| How do increased government regulations affect aggregate supply? | They raise production costs and decrease aggregate supply. |
| Productivity | Efficiency with which inputs are converted into outputs. |
| How does increased productivity affect aggregate supply? | It increases output and shifts aggregate supply right. |
| Technology | Tools and methods that improve production efficiency. |
| How does technology affect aggregate supply? | Improved technology lowers costs and increases aggregate supply. |
| What is the difference between Aggregate demand and regular microeconomic demand? | Aggregate demand is on a big scale while regular demand is on a smaller scale. |
| The price of a bushel of corn jumps as ethanol plants are built across the country to address the need for new sources of energy. Is it Macro or Micro? Why? | Micro, we are only focusing on the increasing need for corn to make ethanol powered energy. |
| Is this movement aggregate demand /supply, or regular demand/ supply? Increase or decrease? | Demand ↑ |
| In the 1930s, the government supported a number of back-to-work programs such as the Works Progress Administration and the Civilian Conservation Corps in an attempt to jump-start a sagging economy. Is it Macro or Micro? Why? | Macro, we are focusing on the effects of government spending added as an investment to companies . |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Aggregate Demand ↑ |
| The New York Red Bulls, who usually sell 15,000 tickets a game, sell 66,000. When the Los Angeles Galaxy and David Beckham come to town. Is it Macro or Micro? Why? | Micro, this is a specific market (tickets). |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Demand ↑ |
| The U.S. government's support of Israel in the Six Day War leads to OPEC reducing the amount of oil available to the United States, dramatically increasing production and transportation costs. Is it Macro or Micro? Why? | Macro, the production of oil is an import into America, we are also looking at how this affects multiple markets. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Aggregate Supply ↓, Higher oil costs raise production costs |
| A study by the American Medical Association shows that the constant wearing of heavy backpacks causes back pain. Is it Macro or Micro? Why? | Micro, this is again a specific market (backpacks). |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Demand ↓ |
| Because the value of the U.S. dollar is declining relative to other currencies American exports have increased. Is it Macro or Micro? Why? | Macro, exports are part of the GDP. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Aggregate Demand ↑ |
| As gas prices increase in reaction to skyrocketing oil prices, consumers are less inclined to purchase gas-guzzling SUVs. Is it Macro or Micro? Why? | Micro, it focuses on a specific market: the market for SUVs, not the entire economy. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Demand ↓ |
| A housing market slump leads to a decrease in the purchase of related goods such as roofing, flooring, appliances, furniture, lighting, and power tools. Is it Macro or Micro? Why? | Micro, complementary goods and it is focusing on the house market. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Demand ↓ |
| While reducing their carbon footprints, firms from Patagonia to Wal-Mart discover that new technology that improves energy efficiency and lowers emissions also lowers production costs. Is it Macro or Micro? Why? | Macro, wide variety of markets not just one market. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Aggregate Supply ↑ |
| Congress passes a $828 billion railroad investment bill to provide high-speed Amtrak trains across the USA. Is it Macro or Micro? Why? | Macro, government spending is part of the GDP. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Aggregate Demand ↑ |
| In an effort to prevent overfishing, the government enacts a ban on tuna fishing in the Pacific Ocean. Is it Macro or Micro? Why? | Mico, affects a specific market (tuna), not the whole economy. |
| Is this movement in aggregate demand/supply, or regular demand/supply? Increase or decrease? | Supply ↓ |
| Q: What happens to AD when government spending increases? | A: AD shifts right. |
| Q: What happens to AD when taxes increase? | A: AD shifts left (less consumer spending). |
| Q: What happens to AS when costs of production increase? | A: AS shifts left. |
| Q: What happens to AS when technology improves or productivity rises? | A: AS shifts right. |
| Q: What is a negative supply shock? | A: A sudden event that raises production costs and shifts AS left (e.g., oil price spike). |
| Q: Effects of a negative supply shock? | A: Higher price level, lower real GDP, leads to stagflation |
| Q: What is long-run self-adjustment? | A: The economy naturally returns to full employment without government intervention. |
| Q: How does self-adjustment work in a recessionary gap? | A: Unemployment rises, wages fall, AS shifts right |
| Q: How does self-adjustment work in an inflationary gap? | A: Labor shortages, wages rise, AS shifts left |
| Q: What does LRAS represent? | A: Full-employment (potential) output |
| Q: Why is LRAS vertical? | A: In the long run, output depends on resources, not price level. |
| Q: What shifts LRAS? | A: Changes in resources (labor, capital), technology, human capital |
| Q: What is a recessionary gap? | A: Real GDP is below full-employment output. |
| Q: Key features of a recessionary gap? | A: High unemployment, low inflation, output in less than potential |
| Q: What is an inflationary gap? | A: Real GDP is above full-employment output. |
| Q: Key features of an inflationary gap? | A: Low unemployment, rising inflation, output is greater than potential |
| Q: How is economic growth shown on graphs? | A: Rightward shift of LRAS, outward shift of PPC |
| Q: What causes economic growth? | A: More capital, better technology, improved education (human capital) |
| What are the causes of inflation? | Demand and cost |
| What is demand (pull up) inflation? | Inflation caused by too much demand chasing too few goods |
| Q: What graph movement causes demand-pull inflation? | A: AD shifts right while AS stays the same. |
| Q: What are common causes of demand-pull inflation? | A: Increase in consumer spending, increase in government spending, tax cuts, increase in exports, increase in money supply |
| Q: What is cost-push inflation? A: Inflation caused by rising production costs. Q: What are common causes of cost-push inflation? | A:Higher wages, increase in raw material,Supply shocks, higher taxes or regulations on producers |
| Q: What graph movement causes cost-push inflation? | A: AS shifts left. |
| Q: What is built-in inflation? | A: Inflation caused by the wage–price spiral. |
| Q: How does the wage–price spiral work? | A: Workers demand higher wages, firms raise prices to cover costs, workers demand even higher wages |
| Q: How can the money supply cause inflation? A: Too much money in the economy increases spending and pushes prices up. Q: Which institution controls the money supply? | A: The Federal Reserve. |
| Q: How can the money supply cause inflation? | A: Too much money in the economy increases spending and pushes prices up. |
| Q: Can inflation occur without economic growth? | A: Yes — especially with cost-push inflation, where prices rise and output falls. |
| Q: Which type of inflation is most likely to cause stagflation? | A: Cost-push inflation. |
| If the economy is left alone what will happen? | It will eventually return to equilibrium. |
| Discretionary Fiscal Policy | When the government acts to change the AD through spending or taxation |
| An example of discretionary fiscal policy? | In recession Congress increases spending |
| Non-Discretionary Fiscal Spending is also called | Automatic Stabilizers |
| Non-Discretionary Fiscal Spending | These are permanent laws already in place that instantly push back against economic swings, no new laws needed. |
| what does the US progressive income tax system do? | It acts to counter cyclically stabilize the economy |
| When GDP is low? | The tax burden on consumers is low promoting consumption and increasing AD. |
| When GDP is up? | There is more tax burden on consumers discouraging consumption and decreasing AD. |
| Employment benefits and social service programs do what? | It acts to counter cyclically stabilize the economy |
| When GDP is down? | Unemployment is higher and more benefits will be paid out this helps to increase AD. |
| When GDP is up? | Unemployment is low and fewer benefits will be paid out decreasing AD. |
| Contractionary Fiscal Policy's main function? | The Brake |
| Contractionary Fiscal Policy | Laws that reduce inflation and decrease GDP effectively closing the inflationary gap. |
| Examples of Contractionary Fiscal Policy? | Increased taxes, decreased government spending, sometimes a combination of both. |
| Expansionary Fiscal Policy's main function? | The Gas |
| Expansionary Fiscal Policy | Laws that reduce unemployment and increase GDP closing a recessionary gap. |
| Examples of Expansionary Fiscal Policy | increased government spending, decrease in taxes, sometimes a combination of both |
| Three time lags in fiscal policy? | Recognition, Administrative, and Operational |
| Recognition lag | Congress must react to economic indicators before it is too late. |
| Administrative lag | Congress takes a long time to pass legislation. |
| Operational Lag | Spending/planning takes time to organize and execute (changing taxation is quicker) |
| What happens when AD increases in the Keynesian range? | Real GDP increases with little or no change in price level. |
| Why doesn’t price level change much in the Keynesian range? | There is excess capacity and unemployed resources. |
| What happens when AD decreases in the Keynesian range? | Real GDP falls, prices remain relatively stable. |
| What happens when AD increases in the Classical range? | Price level increases, real GDP stays constant. |
| Why doesn’t output increase in the Classical range? | The economy is already at full employment. |
| What happens when AD decreases in the Classical range? | Price level decreases, real GDP remains unchanged. |
| What happens when AD increases in the Intermediate range? | Both price level and real GDP increase. |
| Why do prices rise in the Intermediate range? | Some resources are fully employed, causing production costs to rise. |
| What causes demand-pull inflation? | An increase in aggregate demand when the economy is near or at full employment. |
| How can inflation be prevented? | By decreasing aggregate demand. |
| What causes a recession? | A decrease in aggregate demand. |
| How can a recession be prevented or corrected? | By increasing aggregate demand. |
| Why don’t wages fall easily during a recession? | Wages are downwardly rigid. |
| Why might the government intervene in the economy? | To stabilize output and prices during recessions or inflation. |
| What does the AS curve show? | The relationship between price level and real GDP supplied. |
| Why is AS flat in the Keynesian range? | Firms can increase output without raising prices. |
| Why is AS vertical in the Classical range? | Output is fixed at full employment. |
| Why is AS upward sloping in the Intermediate range? | Increasing production leads to higher costs and prices. |
| What happens to real GDP when aggregate demand increases? | Real GDP increases. |
| What happens to the price level when aggregate demand increases? | The price level increases. |
| What happens to unemployment when aggregate demand increases? | Unemployment decreases. |
| What happens to real GDP when aggregate demand decreases? | Real GDP decreases. |
| What happens to the price level when aggregate demand decreases? | The price level decreases. |
| What happens to unemployment when aggregate demand decreases? | Unemployment increases. |
| What happens to real GDP when aggregate supply increases? | Real GDP increases. |
| What happens to the price level when aggregate supply increases? | The price level decreases. |
| What happens to unemployment when aggregate supply increases? | Unemployment decreases. |
| What happens to real GDP when aggregate supply decreases? | Real GDP decreases. |
| What happens to the price level when aggregate supply decreases? | The price level increases. |
| What happens to unemployment when aggregate supply decreases? | Unemployment increases. |
| The government eliminates favorable tax treatment on long-term capital gains. | Discretionary, Contractionary |
| Incomes rise; as a result, people pay a larger fraction of their income in taxes. | Automatic, Contractionary |
| As a result of a recession, more families qualify for food stamps and welfare benefits. | Automatic, Expansionary |
| The government eliminates the deductibility of interest expense for tax purposes. | Discretionary, Contractionary |
| The government launches a major new space program to explore Mars. | Discretionary, Expansionary |
| The government raises Social Security taxes. | Discretionary, Contractionary |
| Corporate profits increase; as a result, government collects more corporate income taxes. | Automatic, Contractionary |
| The government raises corporate income tax rates. | Discretionary, Contractionary |
| The government gives all its employees a large pay raise. | Discretionary, Expansionary |
| The aggregate demand curve assumes that? | Changes in the price affect real wealth |
| Which of the following changes would cause an economy's aggregate demand curve to shift to the right? | An increase in autonomous consumption spending |
| A decrease in the prices of inputs will cause which of the following to occur in the short run? | An increase in the short-run aggregate supply and a decrease in the price level |
| Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States? | Aggregate demand will decrease because the demand for United States exports decreases. |
| A decrease in labor productivity will shift the? | short-run aggregate supply curve to the left |
| Which of the following will most likely cause the short-run aggregate supply curve to shift to the left? | An increase in energy prices |
| Which of the following will cause a rightward shift of the short-run aggregate supply curve? | A decrease in the costs of production |
| An increase in military spending will affect an economy in which of the following ways in the short run? | Aggregate demand will increase. |
| The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand (AD) in Euroland? | There will be a rightward shift in the AD curve. |
| Which of the following statements best describes the long-run aggregate supply curve? | It is vertical because wages and input prices are fully flexible in the long run. |
| The effect on businesses when Hurricane Katrina destroyed oil refineries causing an increase in gasoline prices. | Decrease in AS |
| The government increases spending on the war in Iraq. | Increase in AD |
| The effect on investment when the government decreases the money supply causing interest rates to double. | Decrease in AD |
| Consumer confidence falls as many consumers fear a recession. | Decrease in AD |
| The effect on businesses when the government increases tariffs for imported Chinese resources. | Decrease in AS |
| The result on consumer spending when the government increases taxes for Universal Health Care | Decrease in AD |
| Mexico, a major importer of U.S. goods, has a depression. | Decrease in AD |
| Prices of imported lumber from Canada fall significantly. | Decrease in AS |
| Advances in education makes the workforce more productive. | Increase in AS |
| Graphically, demand-pull inflation is shown as a? | Rightward shift of the AD curve along an upsloping AS curve. |
| Which situation would most likely result in a decrease in the price level and a decrease in real GDP? | A decrease in consumer confidence (Shifts aggregate demand left, lowering both price level and output.) |
| An increase in aggregate supply causes what changes in output and price level? | Output: Increase Price Level: Decrease |
| If the aggregate supply (AS) curve is horizontal and government spending increases, what happens to price level, output, and employment? | Price Level: No change Output: Increase Employment: Increase |
| If equilibrium GDP is in the intermediate range of aggregate supply and interest rates increase, what happens to price level, output, and unemployment? | Price Level: Decrease Output: Decrease Unemployment: Increase |
| In an AD–AS graph, what does the horizontal axis represent? | Real GDP |
| In an AD–AS graph, what does the vertical axis represent? | Price level |
| How does a significant increase in the price of oil affect the AD–AS graph? | Aggregate supply shifts left (decreases) due to higher production costs. |
| What is the effect of an increase in oil prices on real output? | Real output decreases |
| What is the effect of an increase in oil prices on the price level? | Price level increases |
| What is the effect of an increase in oil prices on employment? | Employment decreases |
| What will occur in the self-correcting diagram when there is a recessionary gap? | Output will decrease while unemployment increases |
| What will occur with wages and SRAS in the self-correcting diagram when there is a recessionary gap? | Wages will decrease while SRAS shifts right |
| What do workers real wages do as prices decrease | They increase, and due to high unemployment the will agree to working at lower wages. |
| What will occur in the stabilization policy diagram when there is a recessionary gap? | Fiscal policy --> Expansionary Taxes--> Decrease Govt. Spending --> Increase Transfer Payments --> Increase |
| What will occur in the self-correcting diagram when there is an inflationary gap? | Output will increase while unemployment decreases |
| What will occur with wages and SRAS in the self-correcting diagram when there is an inflationary gap? | Wages will increase while SRAS shifts left |
| What do workers real wages do as prices rise | They will decrease and in the long run, demand higher wages. |
| What will occur in the stabilization policy diagram when there is an inflationary gap? | Fiscal policy --> Contractionary Taxes--> Increase Govt. Spending --> decrease Transfer Payments --> decrease |
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