AP Macroeconomics Key Concepts: Aggregate Supply, Fiscal Policy, and International Trade

What results from simultaneous increases in unemployment and inflation?

A decrease in short-run aggregate supply.

What is the real interest rate if the nominal interest rate is 8% and expected inflation is 3%?

5%.

What policy would close the output gap if potential output is $1,000,000 and current output is $800,000 with a marginal propensity to consume of 0.8?

Increase government spending by $40,000.

What happens to employment when aggregate expenditures decrease according to the Keynesian model?

A decrease in employment.

How do you calculate the unemployment rate with a population of 150 million, a labor force of 100 million, 4 million seeking jobs, and 1 million who have stopped looking?

4%.

What characterizes a recession in terms of output and employment?

Output decreases and employment decreases.

If the reserve requirement is 15% and a customer deposits $1,000, how much do excess reserves increase?

$850.

What could cause cost-push inflation?

An increase in the cost of resources.

If the marginal propensity to consume is 0.75 and income increases by $800, how do consumption and saving change?

Consumption increases $600 and saving increases $200.

What does the study of macroeconomics include?

The federal government's decision to increase military spending.

What happens to the Russian ruble and the American dollar if American demand for Russian products increases?

The Russian ruble appreciates and the American dollar depreciates.

Nations specialize in trade based on what principle?

Comparative advantage.

What is the primary advantage of using automatic stabilizers?

They go into effect without requiring the passage of legislation.

What determines the international value of the U.S. dollar?

Supply and demand for the dollar on international exchange markets.

What policy is likely to increase employment and the price level?

An increase in the purchase of bonds on the open market by the Federal Reserve.

What occurs in the product market of the circular flow model?

Consumers buy finished products from firms.

What is the term for the pleasure or satisfaction received from a product in economics?

Utility.

What does the short-run Phillips Curve illustrate?

The trade-off between inflation and unemployment.

Who benefits from unanticipated inflation?

People who borrowed money with fixed interest rates.

What is crowding out in the context of expansionary fiscal policy?

Government borrowing that forces up interest rates, reducing firms' willingness to invest.

What causes short-run aggregate supply to decrease?

A reduction in government subsidies to producers.

What is the reserve requirement if the banking system has fully loaned $100,000 based on an initial deposit of $20,000?

20%.

What does an increase in long-run aggregate supply also represent?

An outward shift in the production possibilities curve.

What happens when the Federal Reserve sells bonds on the open market?

Money supply decreases, interest rates increase, output decreases, and employment decreases.

What causes a rightward shift in the production possibilities curve?

An increase in the amount of capital equipment.

What is the most appropriate policy action if the U.S. economy has a 10% unemployment rate and a 2% inflation rate?

Reduce the discount rate and increase Federal Reserve purchases of bonds.

What combination of policies effectively reduces the effects of recession?

Increase government spending and reduce the reserve requirement.

What is included in the calculation of gross domestic product from the expenditure approach?

Personal consumption expenditures, gross private domestic investment, government purchases, and net exports.

What do rational expectations theorists argue about government policies to counteract recessions?

They are ineffective because people will anticipate them.

How does Laurel's real income change if her nominal income increases by 2% and inflation is 5%?

It decreased 3%.

What can lead to increases in production possibilities and long-run economic growth?

Increases in the number of resources and improvements in technology.

What are the three functions of money?

Medium of exchange, store of value, and unit of account.

What combination of fiscal policies effectively reduces inflation?

An increase in taxes and a decrease in government spending.

What is true about U.S. federal budget deficits?

Higher deficits cause lower interest rates in the loanable funds market.

What must be true if real GDP increased by 3% and nominal GDP increased by 5%?

The price level increased by 2%.

How is gross domestic product best defined?

The value of all final goods and services produced within a country's borders in one year.