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Macroeconomics120

Final Exam Macroeconomics

QuestionAnswer
If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, people will desire to… Buy interest-bearing assets causing the interest rate to decrease
Shifts AD Curve Pessimism causes household spending and investment to decrease
Consumption increases = AD increases
Theory of Liquidity Preference Keyne’s theory that the interest rate adjusts to bring money supply and money demand into balance
Money Supply (MS) (Liquidity) Controlled by feds
Money Demand (MD) (Liquidity) The liquidity of money explains why people choose to hold cash rather than an asset that could earn you a higher return
Stagflation A period of falling of output and rising prices
Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long-run prices… Are higher and output is the same as the original long-run equilibrium
Automatic Stabilizers Changes in fiscal policy that stimulate AD when the economy goes into recession without policy makers having to take action
Money Demand shifts left… Decrease in the price level
Money Demand shifts right… Increase in the price level
Crowding Out Effect Works in the opposite direction of the multiplier The offset in AD that results when expressing fiscal policy raises the interest rate and thereby reduces investment spending
A decrease in the price level causes the interest rate to Decrease, the dollar to depreciate, and net exports to increase
When the interest rate increases, the opportunity cost of holding money Increases, so the quantity of money demanded decreases.
As the price level decreases, the value of money… increases, so people want to hold less of it.
Marginal Propensity to Consume Proportion of additional income (expressed as a decimal) that will be consumed, rather than saved, by a consumer or by an entire economy. If 90 cents of an additional dollar of income will be consumed, then MPC = 0.90
AD-AS Model Explains price level and output through the relationship of aggregate demand and aggregate supply
When Price Level increases, the quantity of money people want to hold increases Thus price level increases and MD shifts right
Higher interest rate, cost of borrowing increases and the return on savings increases. Consumers spend less and invest less The quantity of goods and services demanded will fall
AD Shifts Right The lower interest rate reduces the cost of borrowing and the return to saving Consumption investment increases Amount of services demanded at each price level increases
AD Shifts Left Feds sell bonds → Money Supply Decreases → Interest Rate Increase → Consumption and investment increase → AD SHIFTS LEFT
SRAS shift left Increase AD, the recession will end but the price level will permanently be higher
SRAS shift right Government can cut spending Fed can reduce money supply to try and bring AD back to the left
When Ghana sells chocolate to the United States, US net exports decrease, and the US net capital outflow decreases.
Other things the same, if the exchange rate changes from .30 Kuwaiti dinar per dollar to .35 Kuwaiti dinar per dollar, the dollar has… appreciated and so buys more Kuwaiti goods.
Other things the same, if the exchange rate changes from 41 Thai bhat per dollar to 35 Thai bhat per dollar, the dollar has depreciated and so buyers fewer Thai goods.
Aggregate Demand List the 3 effects of why AD slopes downward Exchange rate effect Wealth Effect Interest Effect
Wealth Effect an increase in spending that accompanies an increase in perceived wealth.
4 factors that would shift AD curve Expansionary Monetary Policy Contradictory Monetary Policy Expansion Fiscal Policy Contradictory Fiscal Policy
3 theories why SRAS is upward sloping Sticky-Wage Sticky-Price Misconception
Sticky-Price The proposition that some prices adjust slowly in response to market shortages or surpluses
Government Multiplier M-C+FY F=Marginal Propensity to Import, Y=GDP, M=Imports, C=Constant
Tax Multiplier Multiplier in an open economy with international trade is then=1/(1-MPC+f)
What Shifts AD Curve? People choose to spend more rather than save
Created by: andrewgill19