Macroeconomics Unit 3

What is the primary reason for the downward slope of the Aggregate Demand curve?

Interest rate effect, real wealth effect, and exchange rate effect.

What is the relationship between domestic price level and net exports?

As domestic price level increases, domestic products become more expensive for foreign buyers, and foreign goods become less expensive for domestic consumers.

What is the effect of a price level increase from PL to PL1 on Real GDP?

It results in a decrease in Real GDP from Y to Y1.

How is Real GDP best described?

A dollar value that is equal to aggregate output.

How does consumer expectation of improved economic conditions affect consumption?

When consumers expect economic conditions to improve, they buy more goods/services.

What is the relationship between interest rates and investment spending?

There is an inverse relationship between interest rates and investment spending.

How do unplanned increases in business inventories affect investment spending?

They decrease spending on capital goods.

What is the formula for Marginal Propensity to Consume (MPC)?

MPC = Change in Consumption / Change in Disposable Income.

If the MPC is 0.8, what is the spending multiplier?

The spending multiplier is 5.

What is the relationship between the tax multiplier and the spending multiplier?

The tax multiplier is -MPC/MPS, which is negative and inversely related.

What characterizes the Short-Run Aggregate Supply curve?

It shows a positive relationship between the price level and the quantity of goods and services firms supply, assuming sticky prices and wages.

Which factor would cause a rightward shift in the SRAS curve?

A decrease in input costs or an increase in productivity.

What distinguishes Long-Run Aggregate Supply from Short-Run Aggregate Supply?

LRAS has all input prices variable, while SRAS has one fixed input and is characterized by sticky wages and prices.

What defines a recessionary gap?

Price levels remain static due to sticky input prices, leading to a horizontal supply curve despite increased demand.

What causes demand-pull inflation?

An increase in Aggregate Demand.

How does the economy self-adjust to an inflationary gap?

The SRAS shifts to the left, increasing both inflation and unemployment.

What fiscal policy is appropriate for closing a recessionary gap?

Increasing government spending or decreasing taxes to increase Aggregate Demand.

What is an automatic stabilizer?

A mechanism that helps mitigate output gaps automatically without requiring policy changes.

What type of lag occurs during policy debate and legislation?

Legislative lag.

How does the multiplier affect government spending to close a gap?

The change in government spending times the multiplier must equal the size of the output gap.