Unit 5 AP Macro Review

Expansionary fiscal policy is used to close a negative output gap (recessionary gap) by

increasing government spending or decreasing taxes, which shifts the Aggregate Demand (AD) curve to the right.

Contractionary fiscal policy is used to close a positive output gap (inflationary gap) by

decreasing government spending or increasing taxes, which shifts the Aggregate Demand (AD) curve to the left.

The central bank uses expansionary monetary policy to close a negative output gap by

decreasing interest rates or increasing the money supply, which shifts the Aggregate Demand (AD) curve to the right.

The central bank uses contractionary monetary policy to close a positive output gap by

increasing interest rates or decreasing the money supply, which shifts the Aggregate Demand (AD) curve to the left.

In the absence of policy intervention, the economy will self-correct over the long run. Due to the negative output gap,

wages and resource prices will eventually fall, which will shift the Short-Run Aggregate Supply (SRAS) curve to the right.

In the absence of policy intervention, the economy will self-correct over the long run. Due to the positive output gap,

wages and resource prices will eventually rise, which will shift the Short-Run Aggregate Supply (SRAS) curve to the left.

What action could the central bank take to limit inflation caused by expansionary fiscal policy?

The central bank could take contractionary monetary policy actions. This decreases the money supply, raising interest rates. Higher interest rates make borrowing more expensive for consumers and businesses, which reduces consumption and investment, shifting the AD curve to the left and counteracting the inflationary pressure from the fiscal policy. 

When the SRAS curve shifts to the right, the price level shifts _____ and real GDP shifts ______. 

down, up

When the SRAS curve shifts to the left, the price level ______ and real GDP ________.

increases, decreases

Many things influence productivity, including _______________________________.

better management practices, new technology, and sustained labor actions, such as strikes.

The three main drivers of economic growth are _________________________________.

the introduction of new technology, an increase in the labor force, such as a surge in immigration and the discovery or exploitation of a new resource

What are supply-side fiscal policies?

government attempts to create a better climate for business through tax cuts and deregulation with the goal of increasing productivity and shifting the long-run aggregate supply curve to the right.

Crowding out ___ physical capital

accumulation and ___ the rate of growth

slows, slows

Crowding out is the economic phenomenon where _______________. This can happen as the government competes for limited financial resources, driving up interest rates and making it more expensive for private businesses and individuals to borrow money.

increased government spending leads to a decrease in private sector spending and investment.

What is the equation for the quantity theory of money?

M x V = P x Y (M is the money supply, V is the velocity of money, P is the price level, and Y is the real output of goods and services)

The velocity of money is __________________.

the rate at which money circulates through the economy, representing the average number of times a unit of currency is used to purchase goods and services in a given period

Velocity of money is calculated by____________.

dividing a country's nominal GDP by its money supply (V = PQ/M), where V is velocity, PQ is nominal GDP, and M is the money supply.

A high velocity often indicates _____________, while a low velocity can suggest ________________________.

a robust economy with strong spending, economic stagnation or recession as people save more and spend less.

A budget deficit is _______, while the national debt is ___________________.

the shortfall of government spending over revenue in a single year, the total accumulated amount of money the government owes from all past deficits and borrowing

What is a government budget deficit?

When government spending exceeds its revenue in a given period, most commonly a fiscal year.

What is a government budget surplus?

When the government's revenue is greater than its expenditures in a given period, such as a fiscal year.

How does the existence of a large national debt affect government spending in the future?

Future government spending is restricted due to increasing mandatory interest payments, which crowds out funding for other programs and investments. This can also reduce a government's flexibility to respond to emergencies and may lead to higher taxes or less government spending to manage the debt.

When the economy is at full employment, why will an increase in the money supply have no effect on real output in the long run?

Because the economy has reached its maximum productive capacity, and the only outcome is inflation, not a change in the quantity of goods and services produced

The aggregate production function shows a ______ relationship between output per capita and both physical and human capital per capita.

positive

A sustained increase in productivity will shift both the LRAS and the production possibilities curve (PPC) to the _____ because it represents an increase in the economy's ability to produce goods and services

right

In the long run, lower interest rates lead to increased __________, which can boost economic growth and productivity, though it may also lead to inflation and potentially lower competition if dominant firms invest more aggressively to increase their lead

business investment

When the government engages in deficit spending, it significantly impacts the loanable funds market by increasing the _______________, which in turn raises the real interest rate and can lead to a "crowding out" of private investment.

demand for these funds