Review for AP Macro Final
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There are not enough resources available to
produce at point E.
Unexpected inflation is good for some and bad
for others- who benefits? Who is hurt?
Know what happens to income and
employment when AD shifts and when AS shifts
What happens if the exchange rate changes- if
the currency appreciates what happens to
exports and imports? If the currency
depreciates what happens to exports and
imports?
If the economy is operating with high
unemployment- if the fed’s increase the money
supply most likely the employment rates would
increase and the interest rates would decrease.
For economic growth to occur we have to
increase overall productivity- this is most often
achieved by business making investment
(purchasing capital, expanding their factories
etc.)
What is fiscal policy? Who does it? What
actions are involved and what would you do in
recession? In inflation?
We have opportunity cost because of?
What causes the currency to appreciate?
Depreciate?
What indicates economic growth?
What is open market? When the feds take this
action to reduce inflation what would they do?
What does that cause? What would that do to
the banks reserves?
If the feds raised the discount rate what would
that do to demand? Why?
Crowding out is a decrease in?
Would investors increase investment or
decrease investment if the country’s real
interest rates increased more than other
countries?
If there is an increase of foreign money into the
US due to higher real interest rates would the
dollar appreciate or depreciate?
Know who is counted for unemployment.
17. Know the sequence if the fed’s use
contractionary monetary policy. If they do
expansionary monetary policy.
18. What can the feds do for contractionary? For
expansionary?
19. If contractionary monetary policy is taken then:
interest rates will increase, with higher interest
rates investment and consumption will
decrease, that will cause AD to decrease which
will reduce the output and lower the prices.
20. What do you do with MPC and MPS? What is
autonomous consumption?
21. If all prices are flexible then they will change
immediately- we have the SRAS because they
are not flexible.
22. If price levels go up, nominal national income
must go up at same % in order to maintain the
same real output.
23. Be able to analyze supply and demand to see
what will happen with changes in prices or
other factors.
24. Phillips curve is an inverse relation between?
25. An increase in taxes will have less of a multiplier
effect than an increase in government
spending, resulting in a short range increase of
GDP, because of the MPC and MPS.
26. An increase in household income would cause
the dollar to depreciate.
27. Stagflation is generally caused by a decrease in
SRAS or AS.
28. Know how to figure real interest rate with
nominal and expected inflation rate
29. Know what is counted in GDP
30. Advanced technology will cause an increase in
GDP that will cause the LRAS to increase
31. If the fed buys securities from banks what does
that do to the available money to loan? Know
how to figure the increase in the money supply
using different RRR.
32. Go back over the comparative advantage
formula- understand how to do the ratios.
33. Be able to state what will happen to restore
equilibrium when in inflationary and
recessionary status.
34. Know what makes up the AD. Understand that
income taxes reduce consumer’s disposable
income, thus reducing their demand. Income
tax also impacts business. Tax Credits are like
cash vouchers to apply to your tax bill.
35. Know the difference between the types of
unemployment.
36. Marginal propensity to consume is used to
determine the spending multiplier.
37. Know the monetary tools and which way they
go to increase and decrease the money supply,
as well as what action to use when in recession
or in inflation.
38. Understand what Full employment, full output
indicate as well as above and below.
39. Know the fiscal policy tools and which way they
work.
40. Understand that monetary is Federal Reserve
and fiscal is government.
41. Remember that Price level is also referring to
inflation.
42. There are times that the Fed’s will take
expansionary actions while the government
uses contractionary action- this would seem
counterproductive. However, the Fed’s actions
to increase the MS would lower the interest
rates while the government’s actions would
lower the price levels. Combined these two
could result in maintaining the price level but
encourage investment.
43. Firms could decrease production cost by
increasing their output.
44. Know the formula for the unemployment rate
45. When a country increases its money supply,
inflation increases.
46. Know your formula for MPC and the multiplier
47. Fiat money has no intrinsic value
48. Demand pull inflation
49. Nominal GDP and Real GDP with an increase in
money supply
50. When a company has a decrease in labor
productivity then they will decrease supply
because now it is causing them more to
produce- in the short run. In the long run if
productivity remained low then the LRAS would
shift left.
Things to remember
GDP=C+I+G+X-IM
Consumption is approximately 70% of GDP
Go back over what is included in each of the parts
of GDP- remember that only new items for that
year. A new house is investment not consumption.
Remember that investment does not mean stocks
and bonds for the GDP.
The Federal Reserve uses its tools to increase and
decrease interest rates- the ultimate target that
they are aiming for is the Federal Funds Rate- this is
the rate that banks charge other banks to borrow
short term.
The Fed’s cannot actually change the rate, they can
only change the supply of money which should
change interest rates, which should change
investment.
Remember the spending multiplier- 1/1-MPC
MPC+MPS=1
MPC= change in consumer spending/change in DI
The tax multiplier is always less than the spending
multiplier- people do not increase consumption
immediately.
While higher interest rates will reduce the amount
of investment in the country it encourages
international inflow of capital. (foreign countries
will invest cash in countries with higher interest
rates)
Foreign exchange: think of currency from one
country to another like the tokens at different
restaurants. You have to have the right token to
buy the games. If the exchange rate is 1$ = 4 tokens
and then a token machine started giving out 10
tokens for a $ that would increase demand for that
machine (countries exports) That $ had appreciated
in value and the demand increases. With
appreciation imports increases. If the machine gave
2 tokens for a $ it would have depreciated in value,
less demand, fewer dollars converted and imports
would fall so net exports would increase.
Appreciation and depreciation is about what it will
buy in another country. When one country
appreciates then the other country depreciates.
Foreign exchange impacts GDP by the net exports.
A stronger $ means imports increase and exports
decrease so net exports decreases and causes GDP
to decrease.