4089691
| Question | Answer |
| How is potential GDP related to the price level | When Price Levels rise the Money Wage Rate and the Money Prices of resources move at the same percentage rate to remain in at full employment equilibrium. Price Level also affects the AD and AS curves and change the price levels of AD and A |
| How is potential GDP related to aggregate supply? | The AS wants to have it's equi. at the Pot. GDP so it can be at full employment. When the price level rises the Real Wage Rate goes down. The Real GDP fluctuates around the Pot. GDP because Labor Supplied fluctuates around Full employment a |
| How is the aggregate supply curve related to the price level | Price Level is part of the Relationship of AS so The Higher the Price level the the more Quantity Supply of AS V.V. It happens because when real wage rate rises the Price Level Falls and V.V. |
| What happens to aggregate supply when potential GDP increases | Pot. GDP is increased price levels remain the same and moves straight horizontally. The AS is increased but Price Level point remains the same. V.V. |
| How is aggregate demand related to the price level | When Price Levels rise there is a decrease in the quantity of Real GDP demanded. V.V. Also Aggregate demand is the relationship between Price Level and Quantity Demanded of Real GDP with all other factors remaining the same |
| The Buying Power of Money (Quantity demanded of AD) | A rise in price level decreases buying power of money. Because things are more expensive people will save more and Quantity of Real GDP will decrease. |
| Real Interest Rates (Quantity demanded of AD) | When price level rises the real interest rate rises. An increase in price level makes people need more money to get stuff so the demand for money increases and the interest rate rises |
| The Real Prices of Exports and Imports (Quantity demanded of AD) | When the price level rises the goods of a country increases so people will by foreign goods and the quantity of real GDP demanded is less. |
| What are the Three things that happen when Price Level Changes on the quantity demanded of AD | 1. Buying Power of Money 2. Real Interest Rates 3. The Real Prices of Exports and Imports |
| How is the price level related to the buying power of money? | A rise in price level decreases buying power of money. Because things are more expensive people will save more and Quantity of Real GDP will decrease. |
| How does a change in government expenditure affect the aggregate demand curve? | (Fiscal Policy)Is the changing of taxes and transfer payments and government expenditures on goods and services. A decrease in taxes and Increases in the other two will increase AD.This happens because more people have money V.V. |
| If the economy is at macroeconomic equilibrium, how does real GDP compare to potential GDP | Equilibrium is the intersection of AD and AS. Full Employment Equi. is set at the Pot. GDP. Recessionary Equi. Gap is below the Pot. GDP (Price Levels Lower)and the employment is below full employment. Inflationary Equi. Gap (Price Levels Higher) is the V.V. of Recessionary Equi Gap. |
| What could cause cost-push inflation to occur | An inflation that starts because aggregate supply. Quantity of money doesn't grow enough |
| What is fiscal policy and what are its main objectives | Is the use of the federal budget to achieve the macroeconomic objectives of high and sustained economic growth and full employment. It includes taxes, transfer payments and government expenditures |
| What are the three possible states that a government budget can be in? | The budget can be in a surplus deficit and balanced |
| Budget Balance | Budget Balance= Tax Revenues-Outlays |
| Automatic Stabillizers | They work to stabilize Real GDP without the explicit action by the government. This includes Unemployment benefits or other transfer payments programs (Part of Automatic Fiscal Policy) |
| Structural Surplus or Deficit | Is a budget balance run when the economy is at full employment. It's the balance that would occur that the full-employment level of Real GDP would generate given the spending programs and tax laws that Congress enacted |
| What are the supply-side effects of a change in taxes on labor income? | When you make taxes such as consumption expenditure tax and income tax income is taken away from the workers and can't be used to buy goods and services. Because you need to pay more the costs of workers increases and businesses hire less |
| Tax Wedge | This is the difference between what you are making and how much you make. You start off with your salary and subtract tax, consumption expenditure tax and income tax. The difference is your tax wedge. |
| The Crowding Out Effect | During a deficit the demand for loanable funds increases spiking up the Real Interest Rate but Private Investment is decreased because everyone is loaning out there money |
| What is Discretionary Policy | It is used by the government to help stabilize the economy. They do it by changing the outlays or tax revenues. If other things remaining the same any change to the budget causes changes and multipliers in the AD |
| What 4 things do the government use for discretionary policy | 1. Government Expenditure Multiplier 2. The Tax Multiplier 3. Transfer Payment Multipliers 4. The Balanced Budget Multiplier |
| Government Expenditure Multiplier | When the government spends more the AD increases and V.V. This happens because demand includes EXPENDITURE |
| Tax Multiplier | When you increase taxers the disposable income is less decreasing demand for AD V.V. |
| Transfer Payment Multipliers | When you pay people money they have more money to spend so AD increases. V.V. |
| Balanced Budget Multiplier | This is the multiplier of government expenditure and taxes. This keeps things in equilibrium so that it stays at zero gain or loss |
| How does a change in income taxes affect aggregate demand and aggregate supply | When we do a tax cut the AD will increase because of more disposable income and AS firms will have less costs and can buy more labor increasing AS . The AS and AD increase. This increases the Real GDP. Depending on what is stronger price level can rise or decrease |
| To what does the phrase ‘output gap’ refer | It is the percentage deviation of real GDP from Potential GDP and summarizes the aggregate demand to the Pot. GDP. A positive Output Gap means theres an Inflationary gap that brings inflation. A negative is a Recessionary Gap and unemployment is above Natural Unemployment |
| In the United States, who controls monetary policy? | The Federal Reserve controls it and the FOMC (Federal Open Market Committee) is in charge. The President has no power but does elect the members and the Board of Governors |
| What is the federal funds rate | It is the choice monetary policy instrument of the Fed. It is the Interest Rate that Banks borrow from the Fed. |
| What is the opportunity cost of the Federal Funds Rate | Holding Reserves. Holding large reserves alternative is lending to other banks and V.V. |
| When the Fed buys or sells U.S. government securities, what happens to the federal funds rate | When the Fed sells government securities the Reserves decreases and demand increases causing the Federal Funds rate to increase. V.V. |
| In the short run, what happens when the Fed increases the federal funds rate | The other short-term interest rates rise and the exchange rates rise because people want more money to buy the securities. Then the quantity of money and supply of loanable funds decrease because people bought securities. V.V. can happen when they ease and lower federal funds rate |
| In the long run, what determines the real interest rate | Demand and Supply of Loanable Funds. A fall in FFR increases the supply of Bank Loans increasing the supply of loanable funds and lowers the equi. RIR. V.V. |
| If the Fed changes the federal funds rate, what happens to AD, real GDP, and the price level | AD can change because when we increase the FFR the money supply is less because people bought securities and that means less loanable funds increasing RIR. Because of RIR increase AD goes down because things cost more and less demand means less Real GDP and Price Levels fall. V.V. |
| What is the main problem in pursuing monetary policy | It is unpredictable and it takes time to figure out if it worked. Also you don't know if you caused to much or to little and ca cause a recession or inflation. Also so many other factors come into play to which the Fed needs to react to and they use policy to respond |
| What do economists call the proposal to keep the quantity of money growing at a slow constant rate (Milton Friedman) | k-Percent Rule makes the quantity of money grow at a rate of k percent per year. where k equals the growth rate of potential GDP. It relies on a stable demand for money and stable velocity of circulation of money |
| How does the k Percent Rule work | So it makes the quantity of money grow at the same rate and percentage growth rate of Pot. GDP. This was in the hopes to prevent inflation |
| What fundamental force generates international trade | Comparative Advantage is the force that generates trade. China has a comparative advantage over US in T-Shirt production while the U.S. has a comaparitive advantage in airplane manufsacturing |
| Comparative Advantage | The ability for a person or nation to perform an activity or produce a good or service at a lower opportunity cost than anyone else. So when you have less capital or resources for one good but you have them for another product you have a good Comparative Advantage |
| What situation would cause a country to export a good | Domestic Markets have Equilibrium. For Exports the international price level is higher than the domestic level so less Americans buy airplanes but because the international price is high suppliers make more to supply that demand. The difference between the Domestic supply and demand is exports. V.V. is Imports |
| Who gains, who loses, and what are the relative sizes of the gains and losses when a country exports a good | We focus on consumers and producers. For Domestic Consumers exports are bad because they raise the price of good. The gains or losses depend on International Price Point. Domestic Producers win during exports because there getting more money for there goods. Depends on Inter. Price. (V.V for Imports) |
| Tariff | Is a tax that is imposed on a good when it is imported. You have to pay the government to receive goods from another country. |
| Who gains because of a tariff and why (Quantity Demanded and Supplied) | Producers gain more in a tariff because people have to pay more for goods so producers will supply more and because they will get more money for it. Consumers lose because they have to pay more and don't help the gov's revenue. Inter Producers also lose cause demand goes down |
| Import Quota | Is a quantitative restriction on the import of a good that limits the maximum quantity of a good that may be imported in a given period. (It only allows for a certain amount of import goods) |
| Who benefits from an import quota but not from a tariff (Supply and Demand) | Domestic Producers do because Supply is increased pushing up price level making consumers to pay more. Producers start making more because the price rises and get more money for the goods they produce |
| What are three arguments against International Trade | 1. National Security Argument 2. Infant Industry Argument 3. Dumping Argument |
| What is the national security argument for trade restriction? | This argument argues the protection of all defense industries and the resources that feed these industries. For these you need an isolationist country and subsides are more effective to produce these things so there is no need for tariffs and quotas. No international trade basically |
| Infant Industry Argument | Workers need to learn what there doing better so they need to protect these industries so they learn and can mature and compete. But if there protected production isn't as important because gov has there back decreasing incentives and producing a less than stellar product that won't sell |
| Dumping Argument | This consist of nations dumping exports at a lower price than the cost of production. This is caused by Predatory Pricing and Subsidies. Predatory Pricing is when firms sell lower to make competitors go bust and they create a monopoly were they control prices. Subsidies make people not be able to compete and destroys other countries industries |
| What do economists call the record of international receipts and payments | Current Account |
| Current Account | Records receipts from the sale of goods and services to other countries (exports), minus payments for goods and services bought from other countries (imports) plus the net amount of interests and transfers (such as foreign aid payments) received from and paid to other countries |
| What is the U.S. current account and what does it record | The U.S. Current Account consists of Exports of goods and Services, Imports of Goods and Services, Net Interest and Net Transfers. Add this with the Capital and Financial Account and you get the U.S. Official Settlement Account |
| What is the U.S. Capital and Financial account and what does it record | It consists of Foreign Investment in the U.S., U.S. Investment Abroad, Other Net Foreign Investment in the U.S. and Statistical Discrepancy. Add this with the U.S. Current Account and you get the U.S. Official Settlement Account |
| What is the official settlements account and what does it record | The OFSA is the sum of Capital and Financial Account and Current Account and it shows the change in U.S. official reserves. It shows if we are lending or borrowing money in International trade |
| What makes a country a debtor nation | When a country that during it's entire history has borrowed more from the rest of the world than it has lent out to the rest of the world. A debtor nation has a stock of outstanding debt that exceeds the stock of it's own claims on the rest of the world |
| What is the foreign exchange rate | The price at which one currency exchanges for another. This is done on the Foreign Exchange Market |
| What factors are used to show the quantity of U.S. Dollars that traders plan to buy during a given time period | 1. Exchange Rate 2. Interest Rates in the U.S. and other countries 3. The expected future exchange rate |
| The demand of for dollars is a derived demand. Why do do people demand dollars | So that they can buy American made goods and services. They also want U.S. currency to buy assets and securities |
| If the exchange rate rises, what happens to the quantity of dollars demanded | If it rises the demand for the quantity of dollars decreases. When the dollar rises imports become more expensive to foreigners also there is less expected profit so less people will buy |
| To what does the phrase "purchasing power parity" refer? | Is the equal value of money between two currencies. When the value of money changes the purchasing power changes. If the value of the dollar rises the purchasing power of another currency lowers. This makes the people with the other currency spend less |
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