Topics 1.1 and 1.2
The idea that society has unlimited wants and limited resources
The Law of Demand states that there is an ___________ relationship between _______ and ___________________
Inverse; price and quantity demanded
What is the formula to calculate Real GDP?
Base Year Price X Current Year Quantity and Nominal GDP / GDP Deflator X 100
Formula for Calculating Unemployment Rate
Unemployed / Labor Force x 100
CPI Formula
Price of a market Basket / Price of market basket in Base Year X 100
When consumers purchase more cars, what direction does aggregate demand shift and what is the effect on price level and real gdp?
right, increase, increase
The Four Factors of Production
Land, Labor, Capital, Entrepreneurship
If the economy was in a severe recession, the most expansionary fiscal policy would be to
increase government spending and decrease taxes
When the Nominal Interest Rate = 5 and the Inflation Rate = 3, the Real Interest Rate is ___
2%
What happens to the money supply, interest rates, and investment when the Federal Reserve Sells Bonds?
Decrease, Increase, Decrease
Explain why open market operations are less effective when there are ample reserves
When commercial banks hold large amounts of reserves, a change in the money supply from open market operations has little or no effect on the equilibrium interest rate.
Shifts in ________ cause movement along the Phillips Curve
Aggregate Demand (C, I, G, Xn)...AD rightward shift = leftward movement along the Phillips Curve and vice versa
The current account (CA) records
net exports, investment and foreign income, and net transfers
Scenario: To produce 5 shoes, Mr. Haddock must give up 2 hats. What is Mr. Haddock's opportunity cost?
2 hats
An increase in the price of plastic would cause the supply of Dr. Pepper bottles to shift ________, causing price to _______ and quantity to ______
Decrease (shift leftward), increase, and decrease
The Real GDP is $100 Billion and the GDP Deflator is 200. Calculate Nominal GDP.
$200 Billion
Mr. Haddock quits his teaching job to become a lead singer in a band is what type of unemployment? Albums go on sale after the AP Exam
Frictional
25 percent. 500-400/400 x 100
Why is short-run aggregate supply upward sloping
Wages and resource prices are sticky in the short-run.
What is the difference between monetary policy and fiscal policy
Monetary policy is conducted by the central bank and involves adjusting the money supply through the reserve requirement, discount rate, open market operations, and interest on reserves
Fiscal policy is conducted by the government and includes changing government spending and taxation
An example of a fiscal policy action to reduce inflationary pressure would be to increase ______ or decrease ______
taxes; government spending
When interest rates increase, bond prices _______ and when interest rates decrease, bond prices _______. Interest rates and bond prices are _________ related
Decrease; Increase; Inversely
What is the difference between the discount rate and the federal funds rate?
The discount rate is the interest rate the Fed charges banks
The federal funds rate is the interest rate that banks charge each other. The Fed has direct control of the DR but not the FFR
With limited reserves, you draw the ______________ and with ample reserves, draw the ______________
Money Market; Reserve Market
LRPC shifts where there are changes to
The Capital and Financial Account measures the purchase and sale of
A point inside the PPC represents __________, along the PPC represents _________, and outside the PPC represents ______________
Inefficient, Efficient, Impossible/Unattainable
When a producer has a lower opportunity cost in producing a good, it is said that they have the
True or False: Haddock bakes an apple pie from apples grown in his backyard is counted toward GDP
False
The economy of Haddockville is in a negative output when this type of Unemployment is present
Cyclical (someone lost their job due to Covid-19)
Borrowers (they pay back less in real value, at a lower real interest rate)
Explain how the economy selfadjusts in the long run when there is a negative output gap
A decrease in wages and resource prices causes production costs to falls and SRAS to shift to the right
What happens to output and unemployment if investment falls?
Output↓ Unemployment↑
If policy makers use fiscal policy to reduce inflation, what will happen to unemployment rate in the short run?
Unemployment Rate will increase
What is included in the M1 money supply and M2 money suppl
M1 money supply includes cash, currency, checkable deposits, and savings deposits
M2 money supply includes M1 and "near monies" like time deposits (certificates of deposits)
What happens to the money supply, interest rates, and investment when the Federal Reserve decreases the discount rate
Raising the IOR is _____________ monetary policy that ______________ the money supply and ____________ increases _____________ rates
Contractionary; decreases; interest
AD would decrease as borrowing is more expensive
Administered Rates = both bounds shift upward
IOR = only the lower bound shifts upward
An increase in worker's wages and resource costs such as aluminum will cause the SRPC to shift
rightward toward higher rates of inflation (SRAS would shift leftward to self-correct the economy)
Is the US dollar appreciates relative to the Euro, net exports will
Production Possibilities Curves are ____________ when resources are easily adaptable and __________ when resources are NOT easily adaptable
Constant (Straight) and Increasing (Bowed-Out)
Identify a mutually beneficial term of trade for 1 Radio given the following information: 1 Radio for the United States costs 3 pineapples and 1 Radio for Panama costs 1 pineapple
Any number of pineapples between 3 and 1 for 1 Radio (1 Radio for 2 Pineapples)
Households supply __________ in the factor market and demand _____________ in the product market
Resources (Factors of Production); Goods and Services
Why are discouraged workers not included in the unemployment rate?
The unemployment rate includes workers with jobs or actively looking for work. Individuals that are not looking for work are not part of the labor force
People who lose from unanticipated inflation?
Who are lenders, people with fixed incomes, and savers
Explain how the economy self adjusts in the long run when there is a positive output gap
An increase in expected inflation causes wages to increase and SRAS to shift to the left
True or False: An increase in expected inflation will decrease the short-run aggregate supply and increase the Short Run Phillips Curve.
True
A major advantage of automatic stabilizers in fiscal policy is that they
Go into effect without passage of new legislation
A. What is the equation for the money multiplier?
B. ________________ reserve banking is the idea that banks hold a fraction of customers' deposits and lend the remaining funds out,
A. 1/Reserve Requirement
B. Fractional
What is the difference between the money supply and the monetary base?
The money supply includes money in circulation and demand deposits
The monetary base includes money in circulation and bank reserves
If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to
Increase interest on reserves (administered interest rates) to incentivize banks to save funds at the Fed and slow down the economy
The adverse effect of government deficit borrowing (spending) on interest-sensitive spending is known as
Crowding Out (This increases real interest rates and decreases long-run economic growth)
Assume it now takes 150 Pesos to purchase 1 US dollar instead of 300 Pesos. Which currency appreciated and which currency depreciated?
Pesos appreciated, Dollars depreciated
Scenario: How do you show an increase in consumer demand for soap on the PPC?
Draw a shift between two points on the PPC (the curve does not shift)
When demand increases AND supply increases, then price is _______________ and quantity _____________
indeterminate; increases
C + I + G + Xn =
W + R + i + P =
Expenditures Approach
Income Approach = Wages, Rent, Interest, Profit
Identify three types of transactions that are not included in GDP?
Intermediate Goods, Non-Production Transactions (Stocks and used goods), and Non-Market Activities (babysitting for a neighbor)
Assume Haddock receives a wage increase of 4 percent and the actual inflation rate is 3 percent. Will Haddock's real wage be higher, lower, or the same as today? Include values in your answer
Higher by one percent
What is the difference between a market demand curve and the aggregate demand curve?
A market demand shows the demand for one good/service at different prices and quantities. Aggregate demand shows the demand for all goods and services at different price levels and total real gdp
Assume the government initially decreased taxes by 10 billion and the MPC is .8. What is the maximum change to GDP?
AN increase of $40 billion
Spending Multiplier is 5, so the tax multiplier is 4. 10 x 4 = 40
Explain why an increase in government spending will lead to more total spending than a decrease in taxes by the same amount
Households save a portion of a tax cut. The tax multiplier is less than the spending multiplier.
Explain the difference between required reserves and excess reserves
Required reserves are deposits that banks must legally hold and cannot loan out. Excess reserves are the funds that the bank can loan out
Use the money multiplier to identify the maximum change in the money supply
Monetary Policy Action: The Federal Reserve bought bonds, the initial change in the money supply is 10 billion and the reserve requirement is .5
The max change is an increase of $20 billion
1/.5 = 2 (your money multiplier). 2 x 10 = 20
What will happen to the price of bonds if the Central Bank decreases administered interest rates, leading to an increase in aggregate demand?
The price of bonds will increase
How can you show a change in the loanable funds market as a result of crowding out due to government deficit borrowing?
Demand for loanable funds can shift rightward or supply for loanable funds can shift leftward (either way, real interest rates rise)
If Mexico places tariffs on Indian imports, the Peso will _________ and the Rupee will ________
Appreciate; Depreciate