AP economics unit 5

If reduction in AS is followed by an increase in aggregate demand which of the following will definitely occur?

The price level will increase

What combination of fiscal and monetary policy will correct a severe recession?

Decreasing income tax rates and the money supply

Which monetary and fiscal policy mixes will reduce unemployment?

Buying government bonds in the open market and decreasing taxes

When the economy is overheating, there is. Unemployment but high. .

Low, inflation

A short run Philips Curve shows an inverse relationship between

Inflation and unemployment

According to the SRPC lower inflation rates are associated with

higher unemployment rates

Velocity of money

The average times a dollar is spent and re-spent in a year.

What is the equation for the quantity theory of money

M x V = P x Y

What does each letter stand for in the equation for the theory of money which is M x V=P x Y

M=money supply

V=velocity

P=Price level

Y=Quantity of output

What happens in the long run when the central bank (FED) increases in the money supply

-Short run spending eventually leads to higher resource prices and inflation

-If inflation is bad enough backs dont lend and the economy falls

Why do many economists support expansionary monetary policy even tho in the long run it has a negative impact?

Monetary policy can increase real output in the short run

Given a constant velocity of money, in the short run a 5% increase in the money supply will translate to a 5% increase in

Nominal gross domestic product (GDP)

Hyperinflation is typically caused by

Continuous expansion of the money supply to finance government budget deficits

Budget deficit

When annual government spending and transfer payments are greater than tax revenue

Budget surplus

When annual government spending and transfer payments are less than the tax revenue

National debt

Is the accumulation of all the budget deficits over time

If the government increases spending without increasing taxes they will increase the

Annual deficit and the national debt

Assume the government increases deficit spending what will happen to the demand for loanable funds, the real interest rate and private domestic investment?

-Demand increases

-Real interest rate increases

-Private investment decreases

Crowding out

The adverse effect of government borrowing on interest sensitive private sector spending

Crowding out refers to the decrease in

Private investment due to increased borrowing by the government (and vice versa)

An increase in the government budget deficit is most likely to result in an increase in…

The real interest rate

What do economists use to measure economic growth and standard of living?

-Real GDP per capita(per person)

-Growth rate

Real GDP per Capita equation

The real GDP divided by the population

Growth rate

The change in real GDP per capita over time

Why do some countries have more growth?

1.Economic system

2.Rule of Law

3.Capital stock

4.Human capital

5.Natural resources

Economic system

Capitalism promotes innovation and provides incentive to improve productivity.

Rule of law

Countries with solid institutions and policy stability have historically had more economic growth

What action could the central bank take to limit inflation caused by expansionary fiscal policy? Explain

Sell binds, increase reserve requirement and discount rate

When the SRAS curve shifts to the lefts the SRPC shifts to the

Right

When the economy is at full employment, why will an increase in the money supply have no effect on real output in the long run.

Because there was no economic growth because economic growth is not caused by the velocity of money and AD will eventually come back to equilibrium.

How does the existence of a large national debt affect government spending in the future?

Government can’t spend more money since they have a lot of debt.

Crowding out reduces physical capital accumulation and The rate of growth.

Lowers

What 3 things influence productivity

-technological advancements

-Capital Stack

-Human capital

What 3 public policies promote economic growth

-Education/training spending

-infrastructure

-Production/investment

Define supply side fiscal policies

Government policies designed to increase production by reducing business taxers and regulations

What happens to the SRPC as a result of the higher wage ?

Curve shifts to the right because suppliers need to pay their workers more which will shift AS to the left shifting the SRPC to the right

What is the effect of the increase in the expected rate of inflation on the long run Philips Curve

There is no effect

Assume that the nominal interest rate is 8%. Borrowers and lenders expect the rate of inflation to be 3% and the growth rate of the real gross domestic product is 4%. Calculate the real interest rate.

5%