Macroeconomics Exam Review

Flashcards to review key concepts and definitions for macroeconomics exam.

What is measured on the Y-axis in the average model?

Price level.

What happens to inflation as you move up the Y-axis?

Inflation increases.

As GDP (output and income) increases, what happens to unemployment?

Unemployment decreases.

What does disposable income equal?

Income minus taxes plus transfers.

What effect do rising interest rates have on consumer borrowing and aggregate demand?

They make borrowing more expensive, causing consumers to borrow less and reducing aggregate demand.

What is the definition of consumption in economics?

It refers to the total spending by households on goods and services.

What are the components of aggregate demand represented by the formula C + I + G + NX?

Consumption, Investment, Government spending, and Net Exports.

How does an increase in a consumer's wealth affect consumption?

It increases consumption.

What does SRAS stand for in macroeconomic context?

Short Run Aggregate Supply.

What type of inflation occurs when input costs rise?

Cost-push inflation.

What does an increase in aggregate demand typically cause?

Higher output, lower unemployment, and higher price levels.

What is the Long Run Aggregate Supply curve (LRAS) representative of?

The economy's potential output.

What do shifts to the right of the LRAS indicate?

An increase in potential output or productivity.

How does government spending affect aggregate demand?

Increased government spending raises aggregate demand.

What is the fiscal policy tool that has the greatest impact on aggregate demand?

Government spending.

What is the formula for calculating the government spending needed to fix the economy?

Alpha gap divided by the spending multiplier.

What is crowding out in fiscal policy?

When government borrowing decreases investment spending.

What is a major problem with fiscal policy due to time lag?

The recession might self-correct before expansionary policy takes effect.

What is the role of automatic stabilizers in the economy?

They automatically adjust taxes and transfer payments to stabilize the economy during recessions and expansions.

What is the relationship between MPC and MPS in fiscal policy calculations?

MPC is typically larger than MPS.

What happens when government spending is financed by increasing taxes?

It may not change the economy's output.