AP Macro Unit 5 Exam

What increases long run economic growth?

• Human capital (education, training)

• Physical capital (machines, factories)

• Technology

• Natural resources

• Institutions

What decreases long run economic growth?

• Poor education and training

• political instability

• lack of investment in physical capital

• depletion of natural resources

What shifts the Philips Curve? What direction?

• Expected inflation + SRPC have a positive relationship (when expected inflation goes up, SRPC moves right)

• Negative supply shock makes inflation + unemployment go down

• Positive supply shock makes inflation + unemployment go down

What is the tradeoff between inflation & unemployment in the long run?

There is no long-run tradeoff

GDP Formula

C+G+I+(X-M)

Growth Rate Formula

(Y₂-Y₁) / Y₁(100)

What is expansionary fiscal policy? What are the effects of it?

• Increase government spending OR decrease taxes

  • AD shifts right

  • Real GDP increases

  • Unemployment decreases

  • Inflation increases

  • Interest rates increase

What is contractionary fiscal policy? What are the effects of it?

• Decrease government spending OR increase taxes

  • AD shifts left

  • Real GDP decreases

  • Unemployment increases

  • Inflation decreases

  • Interest rates decrease

What is expansionary monetary policy (ample reserves system)? What are the effects of it?

• Lowering administered interest rates (to increase money supply)

  • Interest rates decrease

  • Borrowing increases

What is contractionary monetary policy (ample reserves system)? What are the effects of it?

• Raising administered interest rates

  • Interest rates increase

  • Borrowing decreases

What is expansionary monetary policy (limited reserves system)? What are the effects of it?

• OMO- Buying bonds

• Lower federal funds rate (rate by fed that banks charge each other to borrow money overnight)

  • Interest rates decrease

  • Borrowing increases

What is contractionary monetary policy (limited reserves system)? What are the effects of it?

• OMO- Selling bonds

• Raising federal funds rate

  • Interest rates increase

  • Borrowing decreases

  • Investment decreases

What are the effects of expansionary fiscal + monetary policy?

• AD right

• GDP goes up

• Unemployment goes down

• Inflation goes up

• Interest rates indeterminate

What are the effects of contractionary fiscal + monetary policy?

• AD left

• GDP down

• Unemployment up

• Inflation down

• Interest rates go up

What are the effects of expansionary fiscal + contractionary monetary policy?

• GDP indeterminate

• Unemployment indeterminate

• Inflation indeterminate

• Interest rates go up

What are the effects of contractionary fiscal + expansionary monetary policy?

• GDP indeterminate

• Unemployment indeterminate

• Inflation indeterminate

• Interest rates go down