Macroeconomic exam 2

What is the amended estimate for Real GDP Growth mentioned in the lecture notes?

-1.8%

What effect did the April 2nd tariffs have on imports and net exports?

Imports rose as firms tried to import before tariffs, causing net exports to fall.

What does the Rule of 70 calculate?

It estimates the number of years to double an amount based on the growth rate.

What are the four components of GDP?

Consumption (C), Planned Investment (I), Government purchases (G), Net Exports (NX).

What happens to loanable funds demand when there is technological change?

Deman for loanable funds increases as firms become more profitable.

What is the Great Moderation?

A period since the mid 1980s characterized by mild business cycles.

Define the term 'Marginal Propensity to Consume (MPC)'.

The slope of the consumption function; the amount by which consumption spending changes when disposable income changes.

What is the effect of rising price levels on household wealth?

It decreases the real value of household wealth, causing consumption to fall.

What is the Aggregate Demand Curve?

A curve that shows the relationship between the price level and quantity of real GDP demanded by households, firms, and government.

How does government policy affect aggregate demand?

Through monetary policy and fiscal policy.

What is the Paradox of Thrift?

What seems favorable in the long run may be counterproductive in the short run.

How do higher interest rates affect consumption and investment?

Higher interest rates discourage borrowing, leading to reduced consumption and investment spending.

What is the contribution of retained earnings to economic growth?

Reinvesting profits back into the firm can lead to increases in productivity.

What does consumption have that makes it different from planned investment, government purchases, and net exports?

Consumption has both an autonomous and induced effect.

If aggregate expenditures are less than GDP, what happens to inventories and GDP?

Inventories rise, leading to a decrease in GDP and employment.

What are the three key services of the financial system?

Risk sharing, liquidity, and information.

How do interest rates affect household behavior regarding saving and spending?

Higher interest rates encourage saving rather than spending.

How do nominal assets affect household wealth as price levels rise?

The real value of household wealth declines, leading to less consumption.

What is the purpose of fiscal policy?

To influence economic activity through government spending and taxation.

What are automatic stabilizers?

Economic policies and programs that counteract fluctuations in a nation's economic activity without direct intervention by policymakers.

What is the multiplier effect?

The proportional amount by which GDP increases or decreases in response to a change in government spending or investment.

What is the aggregate supply curve?

A curve that shows the relationship between the price level and the quantity of goods and services that firms are willing to produce.

What factors shift the aggregate supply curve?

Changes in resource prices, technology, and expectations about future price levels.

What does 'potential GDP' refer to?

The maximum output an economy can produce without generating inflation when labor and capital are fully employed.

What is demand-pull inflation?

Inflation that occurs when demand for goods and services exceeds their supply.

What is cost-push inflation?

Inflation that results from an increase in the costs of production, leading to a decrease in aggregate supply.

What is the significance of the Phillips Curve?

It illustrates the inverse relationship between inflation and unemployment in the short run.

What role does the central bank play in management of the economy?

The central bank controls monetary policy, influencing money supply and interest rates to stabilize the economy.