AP MACROECONOMICS: Relationships

A. If interest rates INCREASE --> Investment in Captial Goods ______ --> ________ Productivity --> ________ LRAS

B. If interest rates DECREASE --> Investment in Captial goods _______ --> _______ Productivity --> ______ LRAS

A. Decreases; Decreases; Decreases

B. Increases; Increases; Increases

A. If personal income taxes INCREASES --> Disposable Income _____________

B. If personal income taxes DECREASES --> Disposable Income _________

A. Decreases

B. Increases

A. If Government Spending INCREASES --> AD __________ --> RDGP goes up (national income ________)

B. If Government Spending DECREASES --> AD __________ --> RDGP goes down (national income __________)

A. Increases; national incomes increases

B. Decreases; national income decreases

A. If the Marginal Propensity to consume (MPC) increases --> Spending Multiplier _______ (1/mps)

B. If the Marginal Propensity to consume (MPC) decreases --> Spending Multiplier _______ (1/mps)

A. Increases

B. Decreases

A. If investment in capital goods INCREASES --> Growth/Productivity ________

(This means that in the long run, both the PPC and LRAS move out)

B. If investment in capital goods DECREASES --> Growth/Productivity ________

(This means that in the long run, both the PPC and LRAS will move in or to the left)

A. Increases

B. Decreases

If Inflation INCREASES --> REAL wages ________

(Real anything is adjusted for inflation)

Real Wages DECREASE

If inflation DECREASES --> REAL wages ______

Real Wages INCREASE

If inflation INCREASES --> REAL interest rate _______

Decreases

If Deficit Spending INCREASES --> Interest Rates _______

(Gov. must borrow money --> increase demand for Loanable funds --> Interest rates increase)

AKA: Crowding Out Effect

Increase

A. If Demand for Loanable Funds INCREASES --> Interest rates _______

(Happens when gov. increases spending)

B. If Demand for Loanable Funds DECREASES --> Interest Rates ______

(Happens when people save money)

A. Increase

B. Decrease

A. If the Money Supply INCREASES --> Interest Rates ______ (Buy Bonds, decrease RR, decrease DR) --> EASY MONEY POLICY

B. If the Money Supply Decreases --> Interest Rates ______ (Sell Bonds, Increase RR, Increase DR) --> TIGHT MONEY POLICY

A. Decrease

B. Increase

A. If the dollar APPRECIATES --> Exports _________

(WHY? US goods are now MORE expensive)

B. If the dollar DEPRECIATES --> Exports ________

(WHY? US goods are now LESS expensive)

A. Decrease

B. Increase

IN THE FOREIGN EXCHANGE MARKET:

A. If interest rates INCREASE in the US --> Other countries will buy US financial assets --> Demand for the dollar ________ --> Dollar ________

(After the dollar appreciates, exports decrease and imports increase --> -XN)

B. If interest rates DECREASE in the US --> other countries will NOT buy US financial assets --> Demand for the dollar ________ --> Dollar _______

(After the dollar appreciates, exports increase and imports decrease --> +XN)

A. Increases; Appreciates

B. Decreases; Depreciates

If Interest Rates INCREASE --> Net Capital Inflow ________ into that country

(Money will flow from the country with the low-interest rates into the country with the higher interest rates)

Increases

If Interest Rates INCREASE --> Bond Prices _____ (AND VICE VERSA)

Decrease

If we are in a recession for long enough --> people will accept LOWER NOMINAL WAGES --> SRAS will then ________

Increase