Basics and Measurements
Explain how to show a recession, full employment,and growth on the production possibilities curve
A recession is a point inside the PPC, full employment is a point on the PPC, and economic growth is when the entirePPC shifts outward to the right.
Explain why the long-run aggregate supply curve is vertical.
In the long-run, businesses have no incentive to produce more output when prices increase because resource prices and wages increase proportionately to inflation.
Explain how money serves as a medium of exchange,a store of value, and a unit of account.
Money is used to buy and sell goods and services (medium of exchange), save purchasing power for a later date(store of value), and measure the value of different goods and services (unit of account).
Explain how to show a recessionary gap, inflationary gap, and full employment on the Phillips curve.
A recessionary gap is a point down and to the right on the SRPC, an inflationary gap is up and to the left on the SRPC,and full employment is in the middle where the SRPC and LRPC intersect.
Explain why two currencies can’t appreciate relative to each other at the same time.
The exchange rates of different currencies are reciprocals of each other. When currency A appreciates relative to currency B, then currency B must depreciate relative to currency A.
Explain why transfer payments are not included in Real GDP
GDP measures goods and services produced. Transfer payments are not included because nothing new is purchased or produced.
Explain how to show a negative supply shock using the aggregate demand and supply model.
A negative supply shock results in a leftward shift the SRAS causing the price level to increase and the real GDP to decrease.
Explain why a decrease in the reserve requirement causes the money multiplier to increase.
When The reserve requirement decreases, banks are no longer required to hold as much money in reserve. This allows them to offer more loans and increase the money supply at a faster rate.
Explain why the long-run Phillips curve is vertical.
There is no tradeoff between inflation and unemployment in the long-run. In the long-run, the economy will always be at the natural rate of unemployment(NRU).
Explain the difference between the current account and the capital and financial account.
The Current account measures the sale and purchase of goods and services between countries. The CFA measures the sale and purchase of financial assets like currency,bonds, and stocks.
Explain the difference between an output comparative advantage question and an input question.
An output question is when different amounts of goods are made with equal amounts of resources. An input question is when different amounts of resources are used to make the same amount of goods.
Explain how government spending will affect the overall economy in the short-run.
Government Spending increases real GDP and decreases unemployment.The actual increase in real GDP is significantly more than the initial increase in government spending due to the multiplier effect.
Explain why interest rates and investment are inversely related.
Investment is when businesses borrow to expand their business. When interest rates are high, borrowers will borrow less since the cost of the loan is higher. A low interest rate encourages more borrowing since the cost of the loan is lower.
Explain how to show a negative supply shock using the Phillips curve.
A negative supply shock results in a rightward shift in the SRPC showing an increase in both inflation and unemployment.
Explain why appreciation of the currency results in a decrease in net exports for the country.
When a country's currency appreciates, it becomes more expensive for foreigners. These foreigners purchase fewer goods and services causing net exports to decrease.
Explain how to determine if a country has a comparativeadvantage.
To determine if a country has comparative advantage, compare how much each country gives up when they produce something. The country that has the lower opportunity cost has the comparative advantage.
Explain what happens in the long-run when there is a negative output gap and no policy action.Eventually, resource prices and wages will fall since there is high unemployment.
The SRAS will shift rightward returning the economy to full employment real GDP.This is assuming that wages are flexible.
Explain how open market operations can increase or decrease the money supply.
When the central bank buys previously issued government bonds it allows banks to lend out more money which increases the money supply. The opposite happens when the central bank sells government bonds.
Explain why deficit spending can result in crowding out
When the government borrows it decreases the supply (or increases demand) of loanable funds available for private investment. This increases the real interest rate and decreases the number of loans taken by businesses.
Explain why inflation results in both a decrease in demand and an increase in supply for a country's currency
Inflation causes foreigners to demand less of the country's goods so the demand for the currency falls. Inflation also causes citizens to want relatively cheap foreign goods which increases the supply of the currency.
Explain why either price or quantity are indeterminate when both demand and supply change.
A double shift causes a definitive change in either equilibrium price OR quantity. The one that doesn't definitively change is indeterminate because it depends on the severity (size) of the shift.
Explain why an increase in the MPS causes the spending multiplier to decrease.
When the MPS increases, people save more. This decreases the MPCand the amount people spend.
Explain why a cash deposit of a certain amount creates less money than a purchase of bonds by the central bank of the same amount.
Banks can only lend out a portion of cash deposits so the increase in excess reserves is less than the amount deposited. A bank can lend out all of the money it gets when the central bank buys its bonds since all the funds are added to excess reserves.
Explain why crowding out results in less economic growth in the long-run.
Crowding out causes higher interest rates which decreases investment.Less investment results in less capital stocks andless growth overtime.
Explain why an increase in real interest rate will increase financial capital inflow.
When real interest rates increase, foreigners will want more of that country's currency so they can purchase interest-bearing assets and earn a high rate of return