Unit 3 - National Income & Price Determination - AP Macroeconomics

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How do Expansionary Fiscal Policies affect the Price Level & Real GDP in the Short-Run? (Topic 3.8)

Ex.) Decrease in Taxes

Both increase

What is a downside of using Fiscal Policy to reduce the rate of inflation? (Topic 3.8)

Increase in unemployment & decrease in real GDP.

How does demand-pull inflation differ from cost-push inflation (Topic 3.6)

Demand-Pull = Increased Consumer Spending

Cost-Push = Increased Production Costs

How does a decrease in taxes affect nominal GDP and real GDP? (Topic 3.8)

Both Increase

Assume that MPC is 0.9, government spending increases by $10 billion, and net-exports decreases by $5 billion. How do you find the maximum change in real GDP? (Topic 3.2)

1 - .9 MPC = .1 MPS
1/.1 MPS = 10

10 (Multiplier) * $10 B (Gov. Spending) = $100 B

10 (Multiplier) * - $5 B (Δ In X_N ) = - $50 B

Gov Spending + X_N = 100 + (-50) = $50 B

How will an increase in consumer optimism affect AD, the PL, and real GDP? (Topic 3.6)

↑ C → ↑ AD → ↑ PL → ↑ Real GDP

Will a decrease in aggregate demand create a recessionary gap or an inflationary gap? (Topic 3.6)

↓ AD → Recessionary

How does real output change during a period of demand-pull inflation inflation versus a period of cost-push inflation? (Topic 3.6)

Cost-Push Inflation = ↓ AD
Demand-Pull Inflation = ↑ AD

How does expansionary fiscal policy affect AD? (Topic 3.8)

↑ AD due to ↓ Taxes AND/OR ↑ Gov. Spending

How does a negative supply shock affect the PL and the unemployment rate? (Topic 3.6)

↑ PL + ↓ Real GDP + ↑ Unemployment

How do purchases of newly constructed homes affect investment spending and AD? (Topic 3.1)

↑ I + ↑ AD

How would a combination of higher energy prices and expansionary fiscal policy affect the PL? (Topic 3.6)

↑ PL

Assume that the MPC is 0.75, gov. spending increases by $5 billion, and the X_N decline by $10 billion. How do you find the maximum Δ in equilibrium real income? (Topic 3.2)

1 - .75 = .25

1/.25 = 4 = Multiplier

4 * $ 5B = $20B

4 * -$10B = -$40B

-$40B +$20B = -$20B

Does an increase in the price of oil cause demand-pull inflation or cost-push inflation? (Topic 3.6)

Cost-Push Inflation: ↑ Oil Prices → ↑ PUPC → ↓ SRARS

How does an increase in AD affect the inflation rate? (Topic 3.6)

↑ AD → ↑ Real GDP → ↑ PL → ↑ Inflation Rate → ↓ U

How do expansionary fiscal policies affect the PL and real GDP? (Topic 3.8)

↑ AD → ↑ Real GDP → ↑ PL

What are the three tools of fiscal policy? (Topic 3.8)

Gov. Spending + Taxes + Transfers

Why are wages sticky? (Topic 3.4)

Labor Contracts + Menu Costs + Efficiency Wages + Imperfect Information

How would the discovery of a low-cost energy source affect SRAS? (Topic 3.3)

Low-Cost Energy Source C ↓ PUPC → CSRAS

How would an increase in the price of oil affect SRAS (Topic 3.3)

Increase in oil prices → ↓ PUPC → ↓ SRAS

Would an increase in PUPC create a recessionary gap or an inflationary gap? (Topic 3.6)

↑ PUPC → ↓ Real GDP → ↓ SRAS → ↑ Unemployment = Recessionary Gap

How does currency depreciation affect exports (X), imports (M), net exports (X_N), and AD? (Topic 3.1)

↑ X + ↓ M = ↑ X _N → ↑ AD

How would fiscal policy be used to reduce the rate of unemployment? (Topic 3.8)

↓ Taxes & OR ↑ Gov. Spending → ↑ C → ↑ AD → ↑ PL → ↑ Real GDP → ↓ U

Assume that the MPS is 0.4. How would a $10 billion increase in investment spending affect national income? (Topic 3.2)

1/.4 = 2.5 = Multiplier

2.5 * $10B = $25B

How could fiscal policy be used to reduce the inflation rate? (Topic 3.8)

↑ Taxes & OR ↓ Gov. Spending → ↓ C → ↓ AD → ↓ PL → ↓ Real GDP

How is inflation defined? (Topic 2.4)

The sustained rise in price.

Do households or firms supply the factors of production in the circular flow model? (Topic 2.1)

House = Supply factors of Production

Firms = Goods/Services

How does CPI overstate the true rating of inflation (Topic 2.4)

Ignores substitution bias & quality changes

How does frictional unemployment occur? (Topic 2.3)

Transitions in one’s life

Ex.) School → Workforce

How is investment defined? (Topic 2.4)

Spending on capital goods

How is the natural rate of unemployment defined (Topic 2.3)

Frictional Unemployment + Structural Unemployment

How would unemployed workers becoming discouraged workers affect the total level of employment and the unemployment rate? (Topic 2.3)

Total employment and unemployment rate would decreased

Discouraged Workers ≠Unemployed Workers

Assumed that nominal GDP grows by 11% and real GDP grows by 4%. What is the inflation rate? (Topic 2.3)

Nominal - Real = 11% - 4% = 7%

How is structural unemployment defined? (Topic 2.3)

Unemployment due to outsourcing or replacement (Machinery, AI, etc...)

How would relocating overseas military bases to the United States affect real GDP? (Topic 2.1)

↑ Real GDP