AS/AD
What are the components of GDP?
Consumption + Investment + Government Spending + Net Exports
What are the two components of national savings?
Public savings + private savings
What is used to measure the value of a nation’s currency in terms of another nation’s currency?
The exchange rate
Fill in the blank: MPC + ____ = 1.
MPS
Is selling government securities an expansionary monetary policy, expansionary fiscal policy, contractionary monetary policy, or contractionary fiscal policy?
Contractionary monetary policy
Why does SRAS shift in the long run?
Wages become unstuck
What happens to the real interest rate when the government runs a budget deficit?
Real interest rate will increase
Fill in the blank: When demand for a currency increases, that currency ____.
Appreciates
Suppose that the MPC is 0.75. What is the spending multiplier?
4
Name the two primary fiscal policy actions the government can use.
Taxes and Spending
If aggregate demand decreases in the short run, what will happen to the price level and real GDP in the short run?
Price level decreases and real GDP decreases
Why do private savings increase when the government runs a budget deficit?
Crowding out of investment
What is the relationship between the current account and the financial account?
Any deficit in one account is financed by a surplus in the other (the current account balance + the financial account balance = 0).
Suppose that the MPC is 0.75. What is the tax multiplier?
3
What is one example of an expansionary policy the government can use to close a recessionary gap?
Buy government securities / decrease interest rates / decrease the reserve requirement
What is one monetary policy that will close an inflationary gap?
Increase interest rates / increase the reserve requirement / sell government securities
What happens to national savings when the government increases spending?
National savings decreases
If the interest rate in a country were to decrease, how would that affect the local currency?
Demand decrease/Supply increase/Depreciates
The required reserve ratio is 0.2. A demand deposit is made of $1000. What is the maximum amount the money supply can grow as a result?
$4000
Describe how an increase in the money supply affects aggregate demand.
Increasing the money supply decreases the nominal interest rate which increases investment and interest sensitive consumption spending (such as large purchases that may require a loan).
What will happen to the aggregate supply and aggregate demand graph when there is a decrease in the money supply?
Aggregate demand will decrease in the short run and aggregate supply will increase in the long run.
What happens to the amount of borrowing and spending when interest rates increase?
Borrowing and spending decrease because they both become more expensive
Suppose that the demand for the US Dollar increases. How does this affect US net exports?
US net exports decrease because US goods are now relatively more expensive than other countries’ goods.
Suppose that the MPC is 0.75. The government increases taxes by $1000 to finance $1000 worth of spending. By how much does GDP change?
Tax multiplier = 3, spending multiplier = 4, $4000- $3000 = $1000.
If the unemployment rate is too low, should the Federal Reserve increase or decrease the Federal Funds Rate?
Increase