All Flashcards
What is the impact of increased government spending on infrastructure on AD?
Increases Aggregate Demand, shifting the AD curve to the right.
What is the impact of tax cuts on AD?
Increases disposable income, leading to increased consumer spending and a rightward shift of the AD curve.
What is the impact of increased tariffs on imports on AD?
Initially increases net exports, leading to a rightward shift of the AD curve. However, retaliation from other countries could offset this.
What is the impact of decreased government regulation on businesses on AD?
May encourage investment spending, leading to a rightward shift of the AD curve.
What is the impact of increased government subsidies for education on AD?
Increases human capital, potentially leading to increased productivity and a rightward shift of the AD curve in the long run.
How does contractionary fiscal policy affect AD?
Decreases government spending or increases taxes, leading to a leftward shift of the AD curve.
How does expansionary fiscal policy affect AD?
Increases government spending or decreases taxes, leading to a rightward shift of the AD curve.
What impact does a decrease in income taxes have on AD?
Increases disposable income, leading to increased consumer spending and a rightward shift of the AD curve.
What is the effect of increased transfer payments (e.g., unemployment benefits) on AD?
Increases disposable income for recipients, leading to increased consumer spending and a rightward shift of the AD curve.
How does a policy that encourages increased savings affect AD?
May decrease consumer spending in the short run, leading to a leftward shift of the AD curve. However, increased savings could lead to increased investment in the long run.
What are the differences between market demand and aggregate demand?
Market demand is for a single good/service; aggregate demand is for all goods/services in an economy.
What is the difference between a movement along the AD curve and a shift of the AD curve?
A movement along the curve is caused by a change in the price level; a shift of the curve is caused by changes in C, I, G, or NX.
Differentiate between the Real Wealth Effect and the Interest Rate Effect.
The Real Wealth Effect relates price levels to purchasing power and spending. The Interest Rate Effect relates price levels to interest rates, borrowing, and investment.
Compare and contrast fiscal policy and monetary policy.
Fiscal policy involves government spending and taxation to influence AD. Monetary policy involves central bank actions to control the money supply and interest rates to influence AD.
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current prices, while real GDP is adjusted for inflation.
Compare the effects of an increase in government spending and an increase in consumer confidence on the AD curve.
Both cause a rightward shift of the AD curve, but they originate from different components of GDP (G and C, respectively).
Differentiate between exports and net exports.
Exports are goods and services sold to other countries, while net exports are exports minus imports.
Compare and contrast the short-run and long-run effects of increased government spending on the economy.
In the short run, increased government spending shifts the AD curve to the right. In the long run, it may affect aggregate supply and potential output.
What is the difference between demand-pull inflation and cost-push inflation?
Demand-pull inflation is caused by increases in aggregate demand, while cost-push inflation is caused by decreases in aggregate supply.
Compare the effects of a tax cut targeted at low-income individuals versus a tax cut targeted at high-income individuals on AD.
A tax cut for low-income individuals is likely to have a larger impact on AD because they have a higher marginal propensity to consume.
What is Aggregate Demand (AD)?
Total demand for all goods and services in an economy at various price levels.
What is the Real Wealth Effect?
Higher prices reduce purchasing power, leading to decreased spending; lower prices increase purchasing power, leading to increased spending.
What is the Interest Rate Effect?
Higher prices lead to higher interest rates, discouraging borrowing and investment; lower prices lead to lower interest rates, encouraging borrowing and investment.
What is the Foreign Trade Effect?
Higher domestic prices make exports more expensive, reducing foreign demand; lower domestic prices make exports cheaper, increasing foreign demand.
Define Consumer Spending (C).
Household spending on goods and services.
Define Investment Spending (I).
Spending by firms on capital goods, inventories, and structures.
Define Government Spending (G).
Spending by the government on goods and services.
Define Net Exports (NX).
Exports minus imports.
What is Real GDP?
The total value of all goods and services produced in an economy, adjusted for inflation.
What is Price Level?
The average of all prices in the economy.