AP MACRO Unit 3

As national income rises, what happens to household consumption?

Increases

In countries with higher taxes (like Sweden), consumption makes up:

A smaller share of GDP

What happens to the average prosperity to consume (APC) as income rises?

Decreases

If national income increases by $5 billion and consumption increases by $3 billion, what is the MPC?

0.6

The relationship between MPC and MPS in a closed economy is:

MPC + MPS = 1

When asset prices rise, what happens to consumption?

Increases 

Higher interest rates cause households to:

Save more and consume less

When households are optimistic about the future, consumption tends to

Increase

What is the relationship between interest rates and investments?

Inverse

What is fiscal policy?

A governments use of spending and taxation to influence the economy 

Increasing government spending during a recession is known as 

Expansionary fiscal policy 

The spending multiplier (k) equals:

1/MPS

If MPC =0.8, the spending multiplier is

5

The higher the MPC, the multiplier effect becomes

Larger

The “crowding-out effect” occurs when

Government borrowing reduces private investment

Which of the following best supports expansionary fiscal policy?

The multiplier effect

What does aggregate demand (AD) represent?

The total demand for goods and services in a economy

Which formula represents aggregate demand?

AD= C+I+G(X-M)

On an AD/AS graph, what does the AD curve show?

The relationship between the price level and output demanded

The AD curve slopes____ because as price levels fall, output demanded ___. 

Downward; increases

Why does the AD curve slope downward?

Wealth effect, interest rate effect, and net export effect

What causes a movement along the AD curve?

Change in the price level

If the price level increases, what happens to real GDP demanded?

Decreases

A decrease in the price level causes

A movement down along the AD curve (increases in quantity demanded)

What causes the AD curve to shift?

Changes in non-price factors such as C,I,G, or (X-M)

An increase in consumer confidence will cause AD to:

Shift right

Higher taxes on households will cause AD to:

Shift left

Lower interest rates will cause AD to:

Shift right

A rise in government spending shifts AD:

Right

How to calculate GDP, using spending multiplier

initial change x autonomous spending

The change in GDP can be calculated using the spending multiplier when 

All of the above 

Tax Multiplier Formula

-MPC/MPS

The Tax Multiplier will always be one less than the spending multiplier because

because some of the tax decrease will cause consumers to save them spend

If taxes and government spending increase by the same amount,GDP will increase by

same amount

What does the SRAS curve show?

Supply of all goods and services in the economy

What is on the vertical axis of the SRAS curve?

Price Level

What does the horizontal axis of the SRAS curve represent?

Real GDP / Real Output

Why is the SRAS curve upward sloping?

Higher price levels incentivize production

A decrease in GDP in the short run is associated with:

Lower price levels and higher unemployment

A positive supply shock causes the SRAS curve to:

Shift right

A decrease in wages (resource prices) will:

Shift SRAS right

An increase in resource prices will:

Shift SRAS left

If firms expect lower prices in the future, SRAS will

Shift right

The LRAS curve is

Vertical at full-employment output

The vertical LRAS line touches the x-axis at:

Full-employment output (Yf)

An increase in the quantity of resources shifts LRAS:

Right

Anything that shifts the PPC will also:

Shift LRAS

Short-run equilibrium occurs at the intersection of

AD and SRAS

To find Nominal GDP at equilibrium, you multiply

RGDP × PL

A recessionary gap occurs when

y1 < yf

An inflationary gap occurs when

y1 > yf

Long-run equilibrium occurs when

AD, SRAS, and LRAS intersect

In long-run equilibrium, unemployment equals

The natural rate of unemployment

Which of the following is a component of AD?

C + I + G + X

A decrease in consumer sentiment will

Shift AD left

Demand-pull inflation occurs when:

AD shifts right

Cost-push inflation (stagflation) is caused by:

A dramatic increase in resource prices

Higher business taxes will

Shift SRAS left

If both AD and SRAS increase, the effect on Real GDP is:

Increase

If SRAS increases and AD decreases, the effect on Price Level is

Decrease

When SRAS increases and AD decreases, Real GDP is

Indeterminate

An inflationary gap leads to

Rising wages → SRAS left