econ chapter 24 & 30 study guide

Say’s law is usually understood as which idea?

 Supply creates its own demand.

What is the term for when the quantity of aggregate demand is insufficiently low and there are surpluses of many goods throughout the economy?

General Glut

Which of the following is an implication of Say’s law?

 General gluts are impossible.

Keynes’ law is usually understood as which idea?

Demand creates its own supply.

The levels of which variable are depicted on the vertical axis of the AS-AD model?

 The aggregate price level

The levels of which variable are depicted on the horizontal axis of the AS-AD model?

Real GDP.

Which type of shock can lead to stagflation?

 A negative shock to Short-run Aggregate Supply

Which phenomenon implies that short-run aggregate supply curves are upward sloping?

Sticky wages imply profits rise if there is inflation.

What would be the immediate effect of an increase in government spending?

A positive shock to Aggregate Demand

What is the name of the phenomenon whereby an increase in the aggregate price level decreases the real value (i.e. purchasing power) of money?

 the wealth effect

If current output is below potential output then the economy is experiencing what?

 A recessionary gap

What is the name of the phenomenon whereby a higher aggregate price level makes households demand more money and leads to a rise in interest rates (and a fall in investment and consumer spending).

the interest rate effect

What would be the immediate effect of a decrease in the price of a commodity (e.g. iron ore)?

A positive shock to Short-run Aggregate Supply

What would be an immediate consequence of a stock market crash (resulting in a decrease in aggregate wealth)?

Aggregate demand would decrease (shift left).

What would be the immediate effect of a decrease in taxes paid by individuals (rather than firms)?

 A positive shock to Aggregate Demand

If current output is above potential output then the economy is experiencing what?

An inflationary gap

What is the output gap (percentage) if current output is $1,056 and potential output is $1,200?

-12

What is the output gap (percentage) if current output is $1,120 and potential output is $1,000?

12

What is the output gap (percentage) if current output is $105 and potential output is $100?

5

If an economy has a recessionary gap, which phenomena could eliminate the gap and bring the economy back to potential output?

Either SRAS shifts right or AD shifts right.

If potential output does not change, what would be the long-run consequence if an economy goes from being in a long-run equilibrium to a recessionary gap?

 The aggregate price level would decrease.

Assuming that potential output does not change, what would be the long-run consequence if an economy goes from being in a long-run equilibrium to an Inflationary gap?

The aggregate price level would increase.

Which is the region of the SRAS curve where cyclical unemployment is high and inflationary pressure is not much of a worry?

 the Keynesian zone

The short-run Phillips curve depicts a negative relationship between which two variables?

 the inflation rate & unemployment

The short-run Phillips curve can shift as a result of what?

 a change in inflation expectations

The long long-run Phillips curve is

at the level of unemployment where expected inflation equals actual inflation

In the short run, policies that produce a booming economy also tend to lead to

higher inflation

In the short run, policies that lower inflation also tend to lead to

higher unemployment

Suppose potential output Yp is $1,000 and current output Y1 is $800. To get back to potential output what needs to happen?

output needs to increase by $200.

If potential output Yp is $10,000 and current output Y1 is $11,000 then which statement would be true?

The economy has a inflationary gap of $1,000.

What was the reason given for why expansionary fiscal policy might be necessary when in a recessionary gap?

It can take years for SRAS to shift right and close the gap.

What is the reason most economists give for the persistence of recessionary gaps?

Sticky wages

Fiscal policy involves changing the levels of_____ in order to shift aggregate demand.

 tax revenue and government spending

If the country of Pauper had G = 600 and T = 400, then.

Pauper had a budget deficit of $200

The ratio ∆GDP divided by ∆G is the

multiplier for government spending

Suppose a government has a debt of $1,000 at the end of 2014. In 2015, this country pays off $100 of its debt and has a budget deficit of $300. Then its debt at the end of 2015 is.

$1,200

The country of Icatia has had unemployment insurance laws for decades. These laws are an example of ____in Icatia.

automatic stabilizers

The country of Dubbya just passed a tax cut, for the explicit purpose of increasing aggregate demand. This tax cut is an example of

discretionary fiscal policy

Crowding out occurs when expansionary fiscal policy causes

interest rates to rise

What seems to be true during a liquidity trap?

crowding out does not occur

If the spending multiplier is 4 and there is a recessionary gap of

YP −Y1= $4,000, then how much of an increase in government spending would eliminate the gap?

 $1,000

The short-run aggregate supply curve will shift to the
right

when productivity rises

money

an asset that can be easily used to purchase goods and services

barter

the exchange of goods and services directly for other goods and services without using money. requires double coincidence of wants

medium of exchange

something people universally accept as payment for goods and services

store of value

means of holding purchasing power over time

unit of account

when something is used as the units in prices and other communications of value or cost($, dollar, euro)

commodity money

a good used as a medium of exchange that has intrinsic value in other uses such as gold or silver

commodity-backed money

a medium of exchange with no intrinsic value who’s ultimate value is guaranteed by a promise that it can be converted into a valuable good

fiat money

moneyt with no intrinsic value, but whose value derives from its official status

It’s well known that prisoners have used
cigarettes for money. What type of money would
cigarettes be?

commodity money

currency(in circualtion)

cash held by the public. (e.g. dollar bills and coins)

Checkable bank deposits

bank accts on which people can write checks

money supply

the total value of financial assets in the economy that are considered money

M1 includes:

currency in circulation, saving deposits, checkable bank deposits

M2 includes:

currency in circulation, saving deposits, checkable bank deposits, money market accounts, cirtificatre of deposits, other time deposits

liquidity refers to:

how quickly and easily an asset can be exchanged for its full value

banks

offer deposits, check-writing services, debit and credit cards, and loans.

credit unions

only offer services to members (who are also part owners) – usually higher interest
rates for depositors, lower for borrowers compared to banks

payday lenders and title pawn lenders

offer high interest loans to people who have no better options.

bank reserves

the currency that banks hold in their vaults plus their deposits at the federal reserve

the reserve ratio

the fraction of bank deposits that a bank holds as reserves

what is the reserves ratio for this bank?

10

the aggregate demand curve shifts because of changes in:

expectations, wealth, size of existing stock of physical capital, government policy

the SRAS curve shifts right because of an

decrease in resources, decrease in nominal wages, increase in productivity

the SRAS curve shifts left because of an

increase in resource prices, increase in nominal wages, decline in productivity

the short run aggregate supply curve will shift to the left when…

firms are less profitable

the short run aggregate supply curve shifts to the right when…

when productivity rises

negative demand shock

aggregate willingness to spend less

positive demand shock

aggregate willingness to spend more

positive supply shock

lower prices or higher productivity

negative supply shock

higher input prices or lower productivity

stagflation

the combination if inflation and falling aggregate output that comes with a negative supply shock

the long run

the time it takes for all prices to adjust

long run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist in the long run. it is vertical

short run aggregate supply

upward sloping, how much a business wants to produce(given the price level)

sticky wages

wages dont shift often, sometimes it takes a while for them to adjust

keynes law? short or long?

short run

says law? short or long

long run

keynesian zone

real gdp far below potential and cyclical unemployment is high

neoclassical zone

unemployment is low, shifts in the aggregate supply curve are minimal and the economy is operating at full potential.

intermediate zone

A stage where the economy is experiencing some cyclical unemployment, and output is below potential