"Macro Economics Review"
Macro Economics Review Aggregate Demand/Supply and Fiscal Policy 2009 By: Yogesh and Kurt Every Wrong Answer causes restart to first Question Keep track of the number of times you restarted Total demand for all final goods and Services in the economy at a given price level and time Economy Demand Demand Quantity Aggregate Demanded Demand CORRECT!!!! Aggregate Demand is the total final goods and services demanded in an economy. total supply of goods and services produced by a national economy during a specific time period, available at all possible price levels Economy Supply Supply Quantity Aggregate Supply Supply CORRECT!!!! Aggregate Supply is the amount of final goods and services that producers are willing and able to supply in an economy. DRAW a Graph Showing only AS and AD in equilibrium Price LRAS LRAS AS Level Price AS Level PLe PLe AD Yf Real AD GDP Yf Real GDP Price AS Price AS Level Level PL PL AD AD Y Real Y Real GDP GDP AS and AD CORRECT!!!! Price Level AS PL AS Y Real GDP What is true in the short run that is not true in the long run Horizontal LRAS AS equilibrium Fixed Plant Fixed Labor CORRECT!!!! In the Long Run there are no fixed variables where in the short run there is at least one fixed variable in the production of goods DRAW a Graph of an economy in Long Run Equilibrium Price LRAS AS Price LRAS Level AS Level PLe PLe AD Yf Real AD GDP Yf Real GDP Price AS Price AS Level Level PL PL AD AD Y Real Y Real GDP GDP Economy in Long Run Equilibrium CORRECT!!!! Price Level LRAS AS PLe AD Yf Real GDP Because the economy is equilibrium the intersection of AD and AS is the Long run potential output and price level The government uses spending and revenue collection to influence the economy Open Market Fiscal Policy Operations Monetary Federal Policy Defecit Fiscal Policy is when the government tries to counter fluctuations in aggregate expenditure. CORRECT!!!! Which is not one of the three fiscal policies the government can use to increase aggregate Demand? Decrease Increase Gov’t Taxes Spending Decrease taxes Increase in & Increase Money Supply Spending They can increase government spending Decrease Taxes A combination of the two CORRECT!!!! Which is not one of the three fiscal policies the government can use to decrease aggregate Demand? Increase Decrease Gov’t Taxes Spending Decrease in Decrease taxes Federal & Increase Spending Spending Decrease Government Spending Increase Taxes Or a combination of both CORRECT!!!! If the government wants to close a $100,000 recessionary gap which policy would be more effective in doing so? Decrease Increase Gov’t Taxes Spending Increase in Buy Bonds in Money Supply O.M.O. CORRECT!!!! Increasing government spending would be more efficient. 10,000 dollars spent improves the economy always by 10,000 dollars True False The multiplier effect is that all money spent for consumption are for more incomes for more people and therefore each dollar spent has a multiplier effect on the economy therefore 10,000 almost always has a GREATER effect on the economy. CORRECT!!!! Which of the following is not a fiscal policy multiplier 1/mps 1/(1-mpc) mpc/mps mpc/(1-mps) CORRECT!!!! Spending multiplier=1/MPS Spending multiplier 1/1-MPC Tax multiplier=MPC/MPS CORRECT!!!! The tax multiplier is more than the spending multiplier, which explains why the government prefers to change spending instead of taxes True False Because manipulating taxes will change disposable income and part of disposable income is saved and the money the government spends does not initially involve savings so the tax multiplier is less. Since the tax multiplier is LESS the gov’t prefers changing its own spending CORRECT!!!! Given that the Marginal Propensity to consume is .8 by what amount should government spending increase to close the 100,000 dollar gap? 10,000 100,000 20,000 50,000 CORRECT!!!! Government spending should increase by $20,000. How do you know? What do you divide the Recessionary Gap by in order to find the amount the Gov’t needs to spend Spending 1/mpc Multipler Tax mpc/mps Multiplier If the marginal propensity to consume is .8 then Marginal propensity to save is 1-MPC so MPS=.2 and the spending multiplier is equal to 1/MPS or 5 so 100,000 divided by 5 equals 20,000. If there is an inflationary gap of 500,000 and the government spends 50,000 with a marginal propensity to consume of .66 how much would they increase taxes to close the inflationary gap? 150,000 175,000 200,000 250,000 CORRECT!!!! If the spending multiplier is 1/.33 or 3 therefore the 50,000 spent would cover 150,000. So 350,000 must be covered by increased taxes. The tax multiplier is .66/.33 or 2 so 350,000 divided by two equals 175,000 increased taxes. Which is not a goal of expansionary fiscal policy? Increase Reach AD LRAS Reach Long Improve Rung Resources Equilibrium CORRECT!!!! When the government attempts to close a recessionary gap (when AD is below the LRAS) and so to try to increase the AD is an expansionary fiscal policy. By increasing AD it tries to reach LRAS where long run equilibrium occurs….it does not involve resources Which is affected by a contractionary Fiscal policy? Long Run Natural Rate of Aggregate Unemployment Supply Aggregate Aggregate Demand Supply CORRECT!!!! When there is an inflationary gap (AD is above LRAS) the government would try to decrease AD to bring the economy back to equilibrium, contractionary fiscal policy affects AD while LRAS, LRe, and others are constant. What does a short run Phillips curve not show? Relationship between Inflation Natural Rate of and Unemployment Unemployment Increased Decreased Inflation causes Inflation causes Decreased Increased Unemployment Unemployment A Phillips curve demonstrates the relationship between inflation and unemployment within an economy, in the short run it does not show the natural rate of unemployment. CORRECT!!!!!!!!!!!!!!! DRAW a Phillips curve Phillips Phillips Inflation Curve Unemployment Curve PC PC Unemployment Inflation Phillips Phillips Inflation Unemployment Curve Curve PC PC Unemployment Inflation Phillips Curve Inflation Correct!!!!!!! PC Unemployment Phillips Curve shows a direct positive relationship between Inflation and Unemployment True False Phillips Curve Inflation The curve demonstrates that as inflation decreases unemployment will increase and vice versa. INVERSE RELATIONSHIP PC Unemployment If supply shifts up, what occurs on the Phillips curve? DRAW it Phillips Inflation Curve Phillips Curve Inflation PC 1 PC 2 P Unemployment C Unemploy ment Phillips Phillips Inflation Curve Inflation Curve PC PC 1 1 PC PC 2 2 Unemploymen Unemployment t Supply Shift When supply shifts up price level decreases and the Price AS1 quantity produced in the Level AS2 economy increases therefore inflation falls AND unemployment falls PL1 PL2 Phillips Curve Inflation AD Y1 Y2 Real GDP PC1 PC2 Unemployment Now DRAW what happens when Aggregate Demand increases? Phillips Inflation Curve Phillips Curve Inflation PC 1 PC 2 P Unemployment C Unemploy ment Phillips Phillips Inflation Curve Inflation Curve PC PC 1 1 PC PC 2 2 Unemploymen Unemployment t Supply Shift Because AD increases PL and AS1 Quantity increases this means that inflation increases and unemployment goes down. This means that it is just a slide on the PL2 Phillips curve and not a shift PL1 Phillips Curve AD2 AD1 Inflation Y1 Y2 Real GDP PC Unemployment Which is true of Long Run Phillips Curve? Upward Vertical Sloping Downward Horizontal Sloping Long Run Phillips Inflation Curve LRPC PC2 PC1 Unemployment Which is not true of NRU on the previous graph? Includes Cyclic Long Run Unemployment Unemploym ent Unemployment related to X-value of Inflation in the long run LRPC NRU represents the Natural Rate of Unemployment. And what is that you may ask! NRU is the unemployment rate that an economy operates at when there is no cyclical unemployment (unemployment due to the business cycle) and can only occur when the economy is at its long run potential. What happens when increase in Aggregate Demand is greater than increase in Aggregate Supply? PL up Y down PL down Y down PL down Y up PL up Y up Because the increase in Economy Aggregate Demand is greater than the Increase in Aggregate Supply both Price level and Real GDP increase Price Level AS1 AD2 PL2 PL1 AD2 AD1 Y1 Y2 Real GDP What happens when Decrease in Aggregate Demand is greater than Decrease in Aggregate Supply PL up Y down PL down Y down PL down Y up PL up Y up Economy Because the Decrease in AD is greater than the Decrease in AS Both the price level and Real GDP fall Price Level AS2 AS1 PL1 PL2 AD1 AD2 Y2 Y1 Real GDP What happens when increase in AS is greater than the Increase in AD PL up Y down PL down Y down PL down Y up PL up Y up Because AS increases Economy greater than AD Real GDP will increase and Price Level will fall Price Level AS1 AS2 PL1 PL2 AD2 AD1 Y1 Y2 Real GDP What happens when decrease in AS is greater than decrease in AD? PL up Y down PL down Y down PL down Y up PL up Y up Because decrease in AS is Economy greater than decrease in AD Price level increases and Real GDP falls Price Level AS2 AS1 PL2 PL1 AD1 AD2 Y2 Y1 Real GDP The Impossible Question Which is not a formula for the fiscal Multiplier??????????? ????????? 1 Mpc^(2/3) Sqrt((1+mps)^2-(1+2mps) (Mpc)^(5/3)(mps2) mpc Mps(1-mpc)-2 Sqrt(mps)(1-mpc)-(3/2) Scoring # of Restarts Grade 0-1 Genius 2-3 Good 4-5 Average 6-7 Poor 8+ Horrible