Macroeconomics Test 2

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spopovich
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110227
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Macroeconomics Test 2
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2011-10-19 18:55:32
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Macroeconomics
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Questions for second test
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  1. Aggregate Demand Curve
    The amount of real GDP all sectors of the economy want to purchase at a given rate of inflation.
  2. Reasons the AD Curve Slopes Down
    • Real Balance Effect
    • Interest Rate Effect
    • Foreign Trade effect
  3. Real Balance Effect
    • The lower the inflation/prices, the more people buy (raising GDP)
    • The higher the inflation rate/prices, the less people buy (raising GDP)
    • The Curve never moves, it just goes up and down the curve
  4. Interest Rate Effect
    • Higher interest rates, borrowmoney costs more, so sending goes down (lowering GDP)
    • Lower interest rates, borrowing money cost less, so people spend more (raising GDP)
    • The AD cuvre never moves, it just goes up and down the curve
  5. Foreign Trade Effect
    • When American goods are more expensive than foreigh goods, there will be more imports than exports, so net exports will go down (lowering GDP)
    • When American goods are less expensive than foreigh goods, there will be more exports than imports, so net exports will go up (raising GDP)
    • The AD cuvre never moves, it just goes up and down the curve
  6. What Moves the AD Curve?
    • Consumption
    • Investment
    • Net Exports
    • Government
    • (Basically all the components of GDP)
  7. How Consumption Effects the AD Curve
    • The curve will move left or right depending on more or less of:
    • Peoples Wealth
    • Fututre Expectiations
    • Intereset Rates
    • Taxes
  8. Future ExpectationsInterest RatesTaxesHow Investment Effects the AD Curve
    • The curve will move left or right depending on more or less of:
    • Future Expectations
    • Interest Rates
    • Taxes
  9. How Net Exports Effect the AD Curve
    • The curve will move left or right depending on more or less of:
    • Foreign Income
    • Exchange Rates
  10. How Government Effects the AD Curve
    • When the governement spends more, they raise GDP
    • When they spend less, they lower GDP
  11. Aggregate Supply Curve
    Tells you what level of Real GDP that firms want to produce given what the rate of inflation is
  12. Reasons the SRAS Curve Slopes Up
    • Profit Effect
    • Cost Effect
  13. Profit Effect
    • As individual prices rise, so does the cost of production. Making profits go down, so companies will produce less (Lowering GDP)
    • As individual prices go down, so do the costs of production. Making profits go up, so companies will produce more (Raising GDP)
    • The SRAS cuvre never moves, it just goes up and down the curve
  14. Cost Effect
    As more is being produced the price will go up, but the SRAS curve doesn't move
  15. What Moves the SRAS Curve
    • Changes in the Cost of Production
    • Supply Shock
  16. How Changes in Cost of Production Effects the SRAS Curve
    • The curve will move left or right depending on more or less of:
    • Wages
    • Input Prices
    • Productivity
  17. How Supply Shock Effects the SRAS Curve
    If there is bad weather, disasters, or if oil prices go up, GDP will go down and the SRAS curve will move left
  18. What Kind of Changes in Cost of Production Effect the SRAS Curve?
    • If wages go up, cost of production goes up, so profits go down
    • If input prices go up, cost of production goes up, so profits go down
    • If productivity goes up, cost of production will go down, so profits will go up
  19. Equalibrium Point
    Where the AD and SRAS curve intersect
  20. Excess Supply
    More GDP is being produded than people or consuming or demanding
  21. Excess Demand
    People are demanding more GDP than is being produced
  22. When the AD Curve Moves Left
    • GDP goes down (Bad)
    • Unemployment goes up (Bad)
    • Inflation goes down (Good)
  23. When the AD Curve Moves Right
    • GDP goes up (Good)
    • Unemplyment goes down (Good)
    • Inflation goes up (Bad)
  24. When the SRAS Curve Moves Left
    • GDP goes down (Bad)
    • Unemployement goes up (Bad)
    • Inflation goes up (Bad)
  25. When the SRAS Curve Moves Right
    • GDP goes up (Good)
    • Unemployment goes down (Good)
    • Inflation goes down (Good)
  26. What Moves the LRAS Curve?
    • The LRAS curve does not move in the short run
    • The LRAS curve moves right in the long run due to productivity continuing to rise
  27. Classical Economists Beliefs
    • Says's Law
    • Flexible Wages and Prices
    • Economy Exists in one of 3 states
    • Labor Market changes move you between the 3 states
    • Economy Self Reculates
    • Government Involvement can increase real GDP in the short run, but not in the long run
  28. Say's Law
    Supply creates it's own demand
  29. The Leakage of Say's Law
    • People may save instead of spend
    • This is thought to be resolved by lowering interest rates causing investment spending to rise
  30. Flexible Wages and Prices
    Belief that any disequality is only temperary and is quickly resolved by prices adjusting up or down
  31. The Economy's 3 States
    • Long Run equilibrium
    • Recessionary Gap
    • Inflationary Gap
  32. Long Run Equilibrium
    • When short run equilibium is along the LRAS
    • AD = SRAS = LRAS
    • At Natural Rate of Unemployment
    • At NAtural Rate of Real GDP
  33. Recessionary Gap
    • Short run equilibrium is left of the LRAS
    • Excess Labor
    • Unemployment is above natural rate
  34. Inflationary Gap
    • Short run equilibrium is right of the LRAS
    • Shortage of Labor
    • Unemployment is below the natural rate
  35. How Labor Markets Effect the 3 states of the Economy
    • In a Recessionary Gap there is a surplus in labor so wages will be lower
    • In a Inflationary Gap there is a shortage of labor so wages will be higner
  36. How does the economy self regulate itself?
    • In a recessionary gap people will accept lower wages, giving companies more profit, so they produce more. This moves the SRAS curve right until it reaches long run equilibrium.
    • In an inflationary gap people will have higher wages, making profits less, so companies produce less. This moves the SRAS curve left until it reaches long run equilibrium.
  37. Government Involvement
    • Classical economists believe that governement can increase GDP in the short run, but not in the long run.
    • Classical economists believe that government involvement only raises the inflation rate.
  38. Keynes's Beliefs
    • Does not believe in Say's Law - the leakage is not solved by income in investment.
    • Prices and Wages are inflexible downward
  39. MPC
    • (Marginal Propensity to Consumer)
    • The amount by which consumption spending changes when disposable income changes.
  40. Equation for MPC
    • Change in Consumption over Change in Disposable Income
    • (Change in C over Change in YD)
  41. YD
    • (Disposable Income)
    • Income - Taxes

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