ap macro final exam review

ap macroeconomics final exam review

what shape is supply’s curve

upsloping

what shape is demand’s curve

downsloping

surplus

quantity supplied exceeds the quantity demanded; market forces will push the price back down toward equilibrium

shortage

quantity demanded exceeds the quantity supplied; market forces will push prices back up toward equilibrium\`

money market demand graph

depicts the relationship between the supply of money and the demand for money

an economist who favors expanded government would recommend during a period of inflation or recession

increases in government spending during recession and tax increases during inflation

3 main tools of monetary policy

open market operations, discount rate, and reserve requirement

open market operations

fed buys and sells government bonds/securities to change the money supply and interest rate

what happens when the buying of bonds happens

increase money supply + reduce interest rates

what happens when the selling of bonds happens

reduce money supply + increase interest rate

how do we achieve full employment over time

aggregate demand = aggregate supply

market for loanable funds

determines the real interest rate and how much is loaned out; supply of loanable funds based on savings; demand for loanable funds based on borrowing

aggregate expenditures model

relates aggregate expenditures to real GDP; total/aggregate expenditures in the economy = amount of output produced

equilibrium GDP

when total expenditures = GDP

injections

investments, exports, government spending

leakages

savings, imports, and taxes

recessionary gap

amount that aggregate expenditures fall short of GDP at a full employment level of output

inflationary gap

amount that aggregate expenditures are above GDP at full employment

multiplier effect

government spending intended to stimulate the economy causes increases in private spending that additionally stimulates the economy

how can the fed reduce the federal funds rate

buy out government securities from a group of banks > those banks hold fewer securities and more cash reserves > they lend out them out in fed funds market to other banks

phillips curve

shows the inverse relationship between inflation and unemployment; AD shifts right > inflation inc. > unemployment falls

basic problem portrayed on phillips curve

in the long-run there is no tradeoff between inflation and unemployment

rightward shift of the nation’s LRAS is equivalent to

economic growth

appropriate fiscal policy for a recession

expansionary fiscal policy

an improvement in productivity would do what to aggregate supply

shift it rightward

multiplier

how much does an initial transaction spread throughout the economy; 1 / MPS

what will cause the demand for money to shift on money market demand graph

level of income and real GDP, price level, expectations, transfer costs, and consumer preferences

what will cause an outward shift in the PPC

when the economy grows and all other things remain constant; we can produce more

reserve ratio

commercial banks required reserves / commercial banks checkable deposits

excess reserves

total reserves - required reserves

total reserves

cash in vault + deposits at the fedba

relationship between bank reserves and reserve requirements

bank reserves are calculated by multiplying its total deposits by the reserve ratio

MPC

marginal propensity to consume; the amount that is consumed after a change in income

MPC formula

change in consumption / change in disposable income

how do we use money

medium of exchange, unit of account, and store of value

medium of exchange

buy/sell goods and services

unit of account

measures value

store of value

saving money for later use

how do you calculate the federal budget surplus

government’s total income - government’s total expendituressa

scarcity problem

every society must determine how it will allocate the scarce economic resources (land, labor, capital, and entrepreneurial ability)

M1

currency and checkable depositscu

currency

paper money and token money; coins issued by the us treasury and paper money is fed reserve notes

checkable deposits

checking accounts; commercial banks and thrift establishments

determinants that would cause an increase in aggregate supply

cheaper input prices, better technology, higher levels of productivity, less government regulations or lower taxes, government subsidies

determinants of aggregate demand

changes in consumption spending (C) , changes in investment spending (Ig) , government spending (G), and changes in net exports (Xn)

changes in consumption spending (C)

consumer wealth (more income = more spending, vice versa), consumer expectations, household indebtedness, and taxes

changes in investment spending (Ig)

interest rates and expected rates of return (business taxes, technology, stock of capital already on hand, expected future business conditions)

changes in net exports (Xn)

national income abroad and exchange rateswja

what is the relationship between LRAS and PPC

they are synonymous with one another

tax multiplier

government imposes a tax and MPC is x how much does it impact consumptionta

tax multiplier formula

\-MPC / MPS

what is the impact interest rates have on net exports and domestic investment

real interest rate increases > expected return on domestic assets rises relative to foreign assets

foreign exchange market

the market where currencies are exchanged with one another

exchange rate

the amount/rate in which one currency is exchanged for another

appreciation

value of currency has gone up; high real interest rates, net exports decrease, tastes and preferences for goods increases, inflation decrease, and incomes decrease

depreciation

value of currency has gone down; low interest rates, net exports increase, tastes and preferences for goods decrease, inflation increases, and incomes increase

types of unemployments

frictional, structural, and cyclical

frictional unemployment

temporary, seasonal; recent graduates and people who quit their job to find something better

structural unemployment

skills no longer needed; people who are replaced by technology or new industries (creative destruction) these people need to retrain or move to find work

cyclical unemployment

due to recession; people who are laid off because the economy is weak (downturn in the business cycle)

sticky prices

tendency of prices to remain constant despite changes in supply and demand

sticky wages

when workers earnings don’t adjust quickly to changes in market conditions

GDP through the expenditures approach

C + Ig + G + Xn

what would cause an increase in AD

rise in C, Ig, G, Xn, increase in price and GDP as a result of the shift, and unemployment rate lower than the natural rate of unemploymentw

what would cause a decrease in AD

result of a decrease in C, Ig, Xn, G, decrease in price level and GDP as a result of the shift, and unemployment rate higher than the natural rate of unemployment

what would cause a decrease in AS

higher input prices, lower productivity levels, and more government regulations / raised taxes

what happens when the reserve ratio decreases

lower the amount of cash that banks have to hold in reserves > more loans to consumers and businesses > money supply increases = expands economy

what happens when the reserve ratio increases

increases the amount of money banks have to hold in reserves > less loans > decreases money supply > interest rates go up

nominal interest rate formula

real interest rate + inflation premium

stagflation

high inflation and economic stagnation, slow growth and a high unemployment rate accompanied by inflation

net export effect

where we take our money can determinate how far it may gohigh

what happens to our currency when we have higher interest rates

higher-valued currency

what happens to our currency when we have lower interest rates

lower-valued currency

the capital, current, and financial account must all equal to what

0

what goes into the capital account

foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve

what goes into the current account

goods, services, income, and current transfers

what is the reserve ratio domino effect

related goods

complementary and substitute goods'; a change in the demand for related goods causes the demand curve to shift

input prices

SRAS; when the price level changes and firms produce more in response to that > move along the SRAS curve

comparative advantage

what we have an advantage in and it does not cost us a lot to have an advantage in it

absolute advantage

who can produce the most the fastest regardless of cost

how to calculate opportunity cost

ratio approach, fraction approach

ratio approach to calculating comparative costs

gain : give-up; used when opportunity cost and output are the same unit of measurement

fraction approach to calculating comparative costs

opportunity cost : gain / give-up; used when output and opportunity costs are not measured in the same metric

SRAS shocks impacts

any change that makes production different at any possible price level will shift the SRAS curve; they aren’t anticipated