Unit 2
What is the equation for GDP? (Aggregate Spending)
GDP = C + G + I + (X-M)
How much smaller is the tax multiplier than the expenditure multiplier?
The tax multiplier is always 1 less than the expenditure multiplier. (and negative)
What is a financial asset?
A nonphysical asset that entitles the buyer to future income from the seller.
What is the Quantity Theory of Money?
MV=PY (money supply*velocity of money = price level * aggregate output)
What is included in a country's "current account"?
Balance of payment on goods and services, factor income, and transfers.
What is the natural rate of unemployment?
Frictional Unemployment + Structural Unemployment
What is the exchange rate effect and what is it used as a reason for?
The change in aggregate price level--> an increase in aggregate price level increases the relative price of exports and decreases the relative price of imports which decreases net exports. The exchange rate effect is one of the reasons the demand curve is downward sloping.
What is the equation for the expected real interest rate?
nominal interest rate - expected rate of inflation.
What does monetary neutrality mean?
Monetary Neutrality means that changes in money supply have no real effect on the economy in the long run.
The cost is the same.
What is a price index?
The ratio of the current cost of purchasing a market basket to the cost in a selected base year, multiplied by 100.
What causes stagflation?
A decrease in aggregate supply.
What does are the three roles of 'Money'?
What does government budget deficits do to the loanable funds market?
It shifts the demand curve to the right and results in crowding out of investment.
What exchange rate regime engages in devaluations and revaluations?
Fixed Exchange rate Regime
What would you use to compare the growth of aggregate output to another country?
GDP per captia
How would expansionary fiscal policy effect the interest rate?
Expansionary Fiscal Policy would increase the interest rate.
What shifts the money demand curve?
Money Demand shifts in response to changes in aggregate price level and real GDP.
What curve shifting would also shift the SRPC?
The aggregate supply curve
It would appreciate the currency
What do the national accounts do?
The national accounts keep track of the spending of consumers, sales of produces, business investment spending, government purchases, and a variety of other flows of money among different sectors.
What is the balanced budget multiplier?
The balanced budget multiplier indicates the total increase the total increase in aggregate spending that results from each $1 increase in both government spending and taxes will equal $1.
What is the main tool of central banks in a fractional reserves system?
OMO: Open Market Operations.
What does the Laffer Curve Illustrate?
The Laffer curve shows the effect of tax decreases on tax revenue.
What type of policy cannot be used for domestic policy with a Fixed Exchange Rate?
Monetary Policy