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Macro Unit 5
| Question | Answer |
|---|---|
| What combination of expansionary monetary and fiscal policies can be used to restore full employment? (Recessionary gap) | Decreasing Taxes and Buying bonds, (this is only one of the examples) |
| What combination of contractionary monetary and fiscal policies can be used to restore high inflation? (Inflationary gap) | Increasing taxes and selling bonds, (this is only one example) |
| What is the Phillips Curve? | The inverse relationship between inflation and unemployment |
| What happens to the Phillips Curve in the long run? | It becomes vertical at the natural rate of unemployment. |
| What happens to the Phillips Curve when expected inflation increases? | The curve shifts upward (higher inflation at every unemployment level). |
| What happens to the Phillips Curve when expected inflation decreases? | The curve shifts downward (lower inflation at every unemployment level). |
| What is stagflation? | A situation with high inflation and high unemployment, often caused by a leftward shift of short-run aggregate supply (SRAS). |
| What causes SRAS to shift left? | Higher production costs, such as increased wages or resource prices. |
| What causes SRAS to shift right? | Lower production costs or improvements in productivity. |
| What is the U.S. National Debt? | The total amount of money the U.S. government owes (about $30 trillion). |
| What is the U.S. budget deficit? | The amount the government spends more than it earns in a year (about $1 trillion). |
| What is U.S. federal spending? | The total amount of money the government spends in a year (about $7 trillion). |
| What is U.S. federal revenue? | The total amount of money the government collects in a year (about $5 trillion). |
| What is the difference between debt and deficit? | Debt is the total accumulated borrowing over time; deficit is how much spending exceeds revenue in a single year. |
| What is Medicare/Medicaid? | Government healthcare programs for the elderly and low-income individuals. |
| What is Social Security? | A government program that provides income to elderly and disabled people. |
| What is national defense spending? | Money spent on the military and defense-related activities. |
| What is income security? | Government assistance programs such as welfare, unemployment, and support for those in need. |
| What are net interest payments on debt? | Money the government pays in interest on its accumulated debt. |
| What is U.S. Gross Domestic Product (GDP)? | The total value of all goods and services produced in the U.S. (about $31.3 trillion). |
| What is the Gross Debt to GDP ratio? | A measure comparing national debt to GDP (about 124.83%). |
| What is expansionary fiscal policy? | Increasing government spending or cutting taxes to boost economic activity. |
| What is contractionary fiscal policy? | Decreasing government spending or increasing taxes to slow down the economy. |
| What does an increase in government spending do in AD-AS? | Shifts aggregate demand (AD) to the right. |
| What does a decrease in government spending do in AD-AS? | Shifts aggregate demand (AD) to the left. |
| What does an increase in taxes do in AD-AS? | Shifts aggregate demand (AD) to the left. |
| What does a decrease in taxes do in AD-AS? | Shifts aggregate demand (AD) to the right. |
| Rapidly increasing CPI indidcates? | An inflationary gap |
| What shifts the SRPC to the left. | When SRAS decreases (the unemployment rate and inflation both decrease) |
| What shifts when the SRPC to the right | When SRAS increases (the unemployment rate and inflation both decrease) |
| Stagflation | A situation with rising inflation and falling output |
| Cause of stagflation | Increase in production costs such as higher oil prices causing SRAS to shift left |
| Capital goods and growth | Producing more capital goods today increases future economic growth |
| Quantity theory of money | Equation MV = PY |
| What does the M stand for in the velocity equation? | Money supply |
| Velocity of money | Number of times money is used in transactions during a given period |
| What does the P stand for in the velocity equation? | Price level |
| Real output (real GDP) | Total production adjusted for inflation |
| Increase in money supply | Leads to an increase in nominal GDP |
| Constant real output | An increase in money supply results in inflation |
| Monetarist view | Inflation is primarily caused by excessive growth in the money supply |
| Nominal GDP | Measures output using current prices |
| Real GDP | Measures output using constant prices |
| Crowding out | Government borrowing raises interest rates and reduces private investment |
| Higher interest rates | Reduce consumption and investment, decreasing aggregate demand |
| What does the V stand for in the velocity equation? | Velocity(constant) |
| What does the Y stand for in the velocity equation? | Quantity of output(relatively constant) |
| Investment in human capital | Improves education and health, increases worker productivity, raises incomes, and increases both aggregate supply (AS) and aggregate demand (AD) |
| Investment in physical capital | Increases capital stock such as machines and factories, improves productivity, raises output, and increases both AD and AS |
| Research and development (R&D) | Creates new technologies, improves efficiency, and increases both AD and AS in the short run and long run |
| Supply-side fiscal policy | Government policies like tax cuts and deregulation designed to increase production and long-run economic growth |
| Education and training spending | Increases human capital and improves workforce productivity |
| Infrastructure spending | Improves physical capital such as roads and bridges, increasing efficiency and production |
| Investment incentives | Encourage firms to invest in capital, increasing aggregate supply |
| Supply-side policy criticism | May disproportionately benefit the wealthy and may not result in actual business investment |
| Crowding out | Occurs when government borrowing reduces private sector investment |
| Government borrowing | Increases demand for loanable funds and pushes interest rates higher |
| Higher interest rates | Make borrowing more expensive for firms and households |
| Effect on firms | Businesses reduce investment spending due to higher borrowing costs |
| Effect on consumers | Households reduce spending on big purchases that require loans |
| Impact on aggregate demand | Decrease in investment and consumption lowers aggregate demand |
| Partial crowding out | Government spending is only partly offset by reduced private investment |
| Full crowding out | Government spending is completely offset by a decrease in private investment |
| When crowding out is more likely | Occurs when the economy is near full employment and demand for funds is high |
| When crowding out is less likely | Occurs during a recession when there is less demand for loans and excess capacity in the economy |
| How do you calculate nominal GDP using the equation | Multiply money supply (M) by velocity (V) to get PY |
| How do you calculate the price level (P) | Divide MV by real output (Y) |
| What happens if money supply increases while velocity and output stay constant | The price level increases, causing inflation |
| Example where M = 100, V = 5, Y = 500 | MV = 500, so P = 500 ÷ 500 = 1 |
| What happens if money supply doubles in this example | If M increases from 100 to 200, MV becomes 1000, so P = 1000 ÷ 500 = 2 |
| What does this doubling of P represent | It represents inflation, where the general price level has doubled |
| What happens if real output (Y) increases while M and V stay constant | The price level decreases because more goods are produced with the same amount of money |
| Example of increase in real output | If M = 100, V = 5, and Y increases from 500 to 1000, then P = 500 ÷ 1000 = 0.5 |
| What happens if velocity (V) increases while M and Y stay constant | Nominal GDP (PY) increases, leading to a higher price level |
| Example of velocity increase | If M = 100, V increases from 5 to 10, and Y = 500, then MV = 1000 and P = 2 |
| What happens if both money supply and real output grow at the same rate | The price level remains stable because increases in MV are matched by increases in Y |
| Example of balanced growth | If M doubles and Y also doubles, P stays the same |
| What causes inflation according to the quantity theory of money | Inflation occurs when money supply grows faster than real output |
| Example of inflation from excess money growth | If M increases by 10% but Y increases by only 2%, the price level rises |
| What assumption is often made about velocity in the quantity theory | Velocity is assumed to be constant in the short run |
| Why is the constant velocity assumption important | It means changes in money supply directly affect nominal GDP and prices |
| What happens if velocity is not constant | Changes in V can also affect nominal GDP, making predictions less certain |
| What is the first step of economic growth? | AD will go up (shift right) Companies/Businesses demand more machinery(other capital items) |
| What is the second step of economic growth? | AS will go up (shift right) because we can now produce more |
| What is the third step of economic growth? | LRAS will go up (shift right) goal is achieved |
| Capital Stock | Machinery and and tools purchased by businesses that increase their output (goods that make other goods) |
| Why does political stability encourages investors to buy capital? | Lower risk of policy changes or conflict leads to more long-term investment and efficient resource allocation |
| What happens when the Federal Reserve buys bonds? | Money supply increases, interest rates decrease, investment increases, and aggregate demand rises |
| Why do lower interest rates increase investment? | Borrowing becomes cheaper, so businesses take more loans to invest |
| What happens to price level and real GDP after expansionary monetary policy? | Both price level and real GDP increase due to higher spending |
| Why can contractionary fiscal policy move the government closer to a surplus? | It decreases government spending and increases tax revenue, reducing the deficit |
| Why monetary policy cannot fix a government deficit effectively | It does not directly control government spending or taxation |
| What can a point on the production possibilities curve represent (hint: it's like full employment and efficient use of resources) | Long Run Aggregate Supply |
| How is long-run aggregate supply related to the PPC | Both represent an economy operating at full capacity |
| According to the quantity theory of money, if the velocity of money and price level remain stable, an increase of real GDP will require which of the following? | An increase in the money supply |
| In the long run, expansionary monetary policy will change output and the price level in which of the following ways? | Output will not change and the price level will increase |
| Suppose the government currently has a balanced budget. If there is a decrease in taxes and increase in government spending, what will be the impact on the national debt and the budget? | The national debt will increase and there will be a budget deficit |
| Which of the following policies would be most likely to increase economic growth? | Investment tax credits |
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