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