Macroeconomics Test 2 Flashcards

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Questions and Answers

Alternating periods of economic growth and contraction in real GDP define?

The Inflation Cycle

The Trade Cycle

The Economic Cycle

The Business Cycle (correct)

According to classical theory, what allows a laissez-faire economy to adjust to shifts in aggregate demand?

Flexible wages and prices

According to classical economists, market-driven economies are typically self-adjusting.

True

What does Say's Law state?

Supply creates its own demand Signup and view all the answers

Unlike classical economists, what did Keynes assert about the economy?

The economy was inherently unstable Signup and view all the answers

Who believed that small disturbances in output, prices, or unemployment were likely to be magnified by the invisible hand of the marketplace?

John Maynard Keynes Signup and view all the answers

What is true about the business cycle in the United States?

They vary greatly in length, frequency, and intensity Signup and view all the answers

The inflation-adjusted value of all goods and services is produced by what?

Real GDP Signup and view all the answers

A decline in total real output for two or more consecutive quarters is referred to as what?

A recession Signup and view all the answers

What is considered a desirable outcome of government intervention when expanding the economy?

More jobs Signup and view all the answers

Determinants of macro performance work on macro outcomes through?

Aggregate supply and demand Signup and view all the answers

Why is the aggregate demand curve downward-sloping?

People buy more goods and services at lower average prices Signup and view all the answers

Ceteris paribus, if average prices in the U.S. economy fall, then the?

Foreign trade effect will lead to a higher quantity of U.S. output demanded Signup and view all the answers

Which of the following is not associated with the aggregate supply curve?

The interest rate effect Signup and view all the answers

A positively sloped aggregate supply curve reflects?

The rising costs associated with increased capacity utilization Signup and view all the answers

What are the differences between classical theory and what Keynes believed?

Classical theory asserts that a market economy is inherently stable, while Keynes believed it was inherently unstable. Classical economists trust in flexible wages and prices for self-correction, whereas Keynes argued for government intervention. Signup and view all the answers

What are the different phases of the business cycle?

Expansion, peak, contraction, and trough Signup and view all the answers

What is the Laissez-Faire?

The doctrine of 'leave it alone', of nonintervention by government in the market mechanism Signup and view all the answers

What are the determinants of the macro economy?

Internal Market Forces, External Shocks, and Policy Levers Signup and view all the answers

How is inflation measured?

By changes in a price index such as the consumer price index Signup and view all the answers

What is the difference between Nominal and Real Income?

Nominal is the amount of money received in a given time period, while Real is income in constant dollars adjusted for inflation Signup and view all the answers

What is Money Illusion?

Using nominal dollars rather than real dollars to gauge changes in one's income or wealth Signup and view all the answers

What are the causes of inflation?

Demand-pull and cost-push Signup and view all the answers

What is the effect of inflation on purchasing power?

If prices rise, purchasing power decreases if income does not rise as fast as inflation Signup and view all the answers

How do classical economists view the economy?

The economy self-adjusts, prices and wages are flexible Signup and view all the answers

How did the Keynesian economist view the economy?

Self-adjustment mechanisms did not work during the Great Depression. Signup and view all the answers

What are the major roles of aggregate demand?

Consumption, Investment, Government Spending, and Net Exports Signup and view all the answers

What did Keynes think determined the level of economic activity?

Signup and view all the answers

What is APC?

Total consumption in a given time period divided by total disposable income Signup and view all the answers

What is MPC?

The fraction of each additional dollar of disposable income spent on consumption Signup and view all the answers

What is MPS?

The fraction of each additional dollar of disposable income not spent on consumption Signup and view all the answers

What does AD Shortfall represent?

The amount of additional AD needed to achieve full employment after allowing for price level changes Signup and view all the answers

What does AD Excess represent?

The amount by which AD must be reduced to achieve full employment after allowing for price level changes Signup and view all the answers

What three policy tools are used to address AD Excess and AD Shortfall?

Increase government purchases, cut taxes, and increase transfers for shortfall; reduce government purchases, increase taxes, and reduce transfer payments for excess. Signup and view all the answers

What is crowding out and why is it a problem?

A reduction in private sector borrowing caused by increased government borrowing Signup and view all the answers

What is inflation?

An increase in the average level of prices of goods and services Signup and view all the answers

What does inflation mean?

Average prices are rising, but it is not certain what is happening to relative prices Signup and view all the answers

A decrease in the average level of prices of goods and services is called?

Deflation Signup and view all the answers

What is relative price?

The price of one good in comparison with the price of other goods Signup and view all the answers

If the price of Bluetooth headsets rises 12 percent during a year when the level of average prices rises 13 percent, what happens to the relative price of Bluetooth headsets?

Decreases Signup and view all the answers

If the price of iPods rises 10 percent during a year when the level of average prices rises 3 percent, what happens to the relative price of iPods compared with other goods?

Increases Signup and view all the answers

The redistributive mechanics of inflation include?

Price effects, income effects, and wealth effects Signup and view all the answers

The amount of money income received in a given time period, measured in current dollars is?

Nominal income Signup and view all the answers

Income in constant prices is?

Real income Signup and view all the answers

Inflation ______ the purchasing power of money?

Decreases Signup and view all the answers

If a bank has already lent money at fixed interest rates, then during a period of higher-than-expected inflation, it experiences?

Negative real income effects Signup and view all the answers

Generally speaking, which groups would tend to gain real income from the wealth effects of inflation?

People who own assets that are appreciating faster than the inflation rate Signup and view all the answers

During a period of unanticipated inflation?

Debtors are better off and creditors are worse off Signup and view all the answers

What is money illusion?

Use of nominal dollars rather than real dollars to gauge income or wealth Signup and view all the answers

What are macroeconomic effects of inflation?

Uncertainty, speculation, and bracket creep Signup and view all the answers

Hyperinflation is?

An inflation in excess of 200 percent, lasting at least one year Signup and view all the answers

During a period of deflation?

People on fixed incomes are better off Signup and view all the answers

To compute the real income of a household, the index that should be used is the?

Consumer Price Index (CPI) Signup and view all the answers

If the CPI increases from 110 to 125 for one year, what is the rate of inflation for that year?

13.6 percent Signup and view all the answers

The base period used in computing a price index is?

A fixed reference year from which meaningful comparisons can be made Signup and view all the answers

Aggregate demand is the total quantity of output?

Demanded at alternative price levels in a given time period Signup and view all the answers

The combination of price level and real output that is compatible with both aggregate demand and aggregate supply is the definition of?

Macro equilibrium Signup and view all the answers

According to Keynesian theory, what is true about short-term macro equilibria?

The economy may or may not be at full employment, the aggregate demand curve intersects the aggregate supply curve, and producers are selling everything they currently produce. Signup and view all the answers

What are the components of aggregate demand?

Consumption, Government Spending, Net Exports, and Investments Signup and view all the answers

What do consumption expenditures account for?

Over two-thirds of total spending Signup and view all the answers

What influence does disposable income have on consumption decisions according to Keynes?

Disposable income has the strongest influence Signup and view all the answers

When consumer spending exceeds disposable income, what is true?

APS is negative, APC is greater than 1, and households are dissaving Signup and view all the answers

When the APC is greater than 1, the APS must be?

Negative Signup and view all the answers

The MPC indicates the fraction of?

An additional dollar of disposable income will be spent Signup and view all the answers

The MPC + MPS must always equal?

1 Signup and view all the answers

The consumption function implies that?

Consumption increases as disposable income increases Signup and view all the answers

With respect to the aggregate demand curve, improved consumer confidence would?

Shift the curve rightward Signup and view all the answers

If the availability of credit increases, then?

The AD curve will shift to the right Signup and view all the answers

Investment spending includes expenditures on what?

Equipment, inventory, and plants or office buildings Signup and view all the answers

Why wouldn't market participants always want to buy all the output produced?

Consumers, businesses, and government are independent factors. Incomes may be down, expectations poor, or prices may be high preventing all output from being purchased. Signup and view all the answers

Study Notes

Business Cycle

Alternating periods of economic growth and contraction characterize the business cycle.
Recessions are defined as declines in total real output for two or more consecutive quarters.

Classical Theory vs. Keynesian Economics

Classical theory posits that flexible wages and prices allow a laissez-faire economy to self-adjust to shifts in aggregate demand.
Keynes argued that the economy is inherently unstable and requires government intervention to restore full-employment equilibrium.
Say’s Law asserts that supply creates its own demand, a fundamental belief of classical economists.

Economic Indicators

Real GDP measures the inflation-adjusted value of all goods and services produced.
Inflation is measured by changes in a price index, such as the Consumer Price Index (CPI).

Aggregate Demand and Supply

Aggregate demand (AD) components include consumption (C), investment (I), government spending (G), and net exports (X-M).
The aggregate demand curve slopes downward, indicating that lower average prices increase the quantity of goods and services demanded.
The aggregate supply curve reflects rising costs associated with increased capacity utilization.

Inflation

Inflation indicates an increase in the average level of prices for goods and services, leading to decreased purchasing power.
Causes include demand-pull inflation (excessive demand) and cost-push inflation (higher production costs).
Hyperinflation is defined as inflation exceeding 200%, lasting at least one year.

Consumer Behavior

The Average Propensity to Consume (APC) measures the ratio of total consumption to total disposable income (C/Yd).
Marginal Propensity to Consume (MPC) indicates the fraction of additional disposable income spent on consumption.
Seasonally adjusted fixed interest rates negatively impact banks during periods of unexpected inflation.

Macroeconomic Effects

Effects of inflation include uncertainty, speculation, and bracket creep.
The redistribution mechanics of inflation involve price effects, income effects, and wealth effects.

Monetary Concepts

Nominal income is the current dollar amount earned within a time period, while real income accounts for inflation adjustments.
Money illusion refers to judging one’s economic well-being based on nominal rather than real dollars.

Policy Tools for Aggregate Demand

Addressing aggregate demand shortfalls involves increasing government purchases, cutting taxes, or increasing transfers.
Reducing aggregate demand excesses requires lowering government purchases, raising taxes, or reducing transfer payments.

Economic Phases

The business cycle consists of growth phases (expansion), peak, contraction (recession), and trough.
Increased consumer confidence shifts the aggregate demand curve rightward, while higher interest rates restrict demand.

Market Behavior

Classical economists believe in self-adjusting market mechanisms, whereas Keynesians emphasize potential failures in these adjustments during economic downturns.
If overall spending surpasses disposable income, the Average Propensity to Save (APS) can turn negative, indicating households are dissaving.

Investment Spending

Investment expenditure accounts for spending on equipment, inventory, and facilities, which are crucial for economic growth.

Final Thoughts

An understanding of key economic principles guides recognition of how various factors, including policy and consumer behavior, influence the macroeconomic landscape.

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Test your knowledge on key concepts in Macroeconomics with these flashcards. Covering topics such as the business cycle and classical economic theory, this quiz is perfect for students preparing for exams. Enhance your understanding of economic principles and their real-world applications.