Final Exam Review - Economics

Chapter 10: Consumption and Aggregate Expenditure

Q: What is the formula for Disposable Income?
A: Disposable Income = Consumption + Savings.

Q: How do you label the axes for the Consumption Function graph?
A: X-Axis: Real Disposable Income; Y-Axis: Consumer Spending.

Q: What is the formula for the Marginal Propensity to Consume (MPC)?
A: MPC = Change in Consumption / Change in Income.

Q: What happens to consumption when net wealth decreases?
A: Consumption decreases, savings increase, and the consumption function shifts downward.

Q: What is the formula for the Simple Spending Multiplier?
A: Multiplier = 1 / (1 - MPC).

Q: What is the equation for Aggregate Expenditure (AE)?
A: AE = C + I + G + (X - M).

Chapter 11: Aggregate Supply and Demand

Q: How do you label the axes for the Aggregate Supply and Demand graph?
A: X-Axis: Real GDP; Y-Axis: Price Level.

Q: What causes the Aggregate Demand (AD) curve to shift?
A: Changes in consumption, investment, government spending, or net exports.

Q: What is the shape of the Long-Run Aggregate Supply (LRAS) curve?
A: A vertical line at potential GDP.

Q: What shifts the Short-Run Aggregate Supply (SRAS) curve?
A: Changes in input costs, productivity, or expectations.

Chapter 12: Income-Expenditure Model

Q: What does the 45-degree line represent in the Income-Expenditure model?
A: Points where Aggregate Expenditure equals GDP.

Q: What is a recessionary gap?
A: When AE intersects below full employment GDP.

Q: How do unintended inventory changes signal adjustments in production?
A: Inventories decrease when AE > GDP, signaling increased production.

Chapter 14: Budget and Deficit

Q: What is "crowding out"?
A: Government borrowing reduces funds available for private borrowers, raising interest rates.

Q: How does foreign ownership of debt affect future generations?
A: It increases the burden due to higher interest payments to foreign creditors.

Q: What is the difference between a budget deficit and national debt?
A: Budget deficit: Annual shortfall of revenue vs. spending. National debt: Accumulation of deficits.

Chapter 15: Money Market

Q: What are the three functions of money?
A: Medium of Exchange, Unit of Account, and Store of Value.

Q: What is the difference between commodity money and fiat money?
A: Commodity money has intrinsic value (e.g., gold); fiat money has value by government decree.

Q: Why is the money supply curve vertical?
A: The Fed controls the money supply independently of the interest rate.

Chapter 16: Banking and Money Creation

Q: What is the formula for the Money Multiplier?
A: Multiplier = 1 / Reserve Ratio.

Q: What happens to the Money Multiplier if the Reserve Ratio increases?
A: The Money Multiplier decreases.

Q: How do banks create money through loans?
A: By lending out deposits, which creates new checking account balances.

Chapter 17: Monetary Policy

Q: What happens to interest rates when the Fed increases the money supply?
A: Interest rates decrease.

Q: How does expansionary monetary policy shift the Aggregate Demand curve?
A: It shifts the AD curve to the right.

Q: In the long run, what is the only impact of increasing the money supply?
A: Higher price levels (inflation).

Q: What is the equation for the Quantity Theory of Money?
A: MV = PY (Money Supply x Velocity = Price Level x Real GDP).