Econ-Final Study Set

What are the four macroeconomic goals?

Growth in the standard of living (GDP), low unemployment, low inflation, and sustainable balance of trade.

What is potential GDP?

The maximum output an economy can produce without increasing inflation.

How does the Short-term Aggregate Supply (AS) curve generally move during economic growth?

The AS curve moves to the right to indicate growth.

What does a shift to the left in Aggregate Demand (AD) signify?

A decrease in demand, which typically leads to lower GDP and higher unemployment.

Define stagflation.

A situation in the economy characterized by slow economic growth, high unemployment, and rising inflation.

What is meant by Keynesian economics?

An economic theory that emphasizes the role of aggregate demand in driving economic performance and suggests increased government spending during recessions.

What does the Phillips Curve illustrate?

The short-term trade-off between unemployment and inflation.

What is the role of financial intermediaries?

Institutions that act as middlemen between savers and borrowers, facilitating the flow of funds in the economy.

What happens in the economy during an expansionary monetary policy?

This policy increases the money supply and reduces interest rates, stimulating borrowing, spending, and ultimately boosting Aggregate Demand.

How does an appreciating currency affect export businesses?

An appreciating currency makes exports more expensive for foreign buyers, potentially reducing sales.

What are menu costs?

The costs associated with changing prices, including the expenses of reprinting menus, labels, and updating marketing materials.

What are the components of Aggregate Demand?

Consumption, investment by businesses, government spending, and net exports.

Explain the concept of the natural rate of unemployment.

The level of unemployment that exists when the economy is healthy and functioning at full capacity.

How do changes in interest rates impact currency values?

Higher interest rates tend to attract foreign capital, leading to an appreciation of the currency; conversely, lower interest rates can lead to depreciation.

What is the impact of fiscal policy on Aggregate Demand?

Fiscal policy can stimulate demand and return the economy to equilibrium by changing government spending and taxation.

What is the importance of productivity in the economy?

Productivity is crucial as it directly influences an economy’s capacity to produce goods and services, driving long-term economic growth.

What is the central focus of neoclassical economics?

The belief that supply drives the economy and that long-term growth is more important than short-term fluctuations.

What does a contractionary monetary policy aim to achieve?

To reduce Aggregate Demand by increasing interest rates and thus lowering borrowing and spending.

How do exchange rate policies affect an economy?

Exchange rate policies influence inflation, trade balances, financial stability, and the effectiveness of monetary policy.

What is the permanent income hypothesis?

The theory that people base consumption on their expected long-term income rather than their current income.

What are the implications of a currency that is significantly depreciating?

It may lead to higher inflation as import prices rise, while also increasing the competitiveness of exports.

What does the term 'double coincidence of wants' refer to in barter?

A situation where both parties in a trade want exactly what the other party has to offer.