All Flashcards
Analyze an AD/AS graph showing the impact of expansionary fiscal policy.
The AD curve shifts to the right, increasing both price level and real GDP in the short run. In the long run, wages and prices adjust, potentially shifting the SRAS curve leftward.
Analyze an AD/AS graph showing the impact of contractionary monetary policy.
The AD curve shifts to the left, decreasing both price level and real GDP in the short run. This aims to reduce inflation.
Analyze a Phillips Curve graph showing the effect of a supply shock.
The SRPC shifts upward, indicating higher inflation for any given level of unemployment. The LRPC remains vertical at the natural rate of unemployment.
Analyze an AD/AS graph showing the economy operating below full employment.
The equilibrium is to the left of the LRAS curve, indicating a recessionary gap. There is potential for increased output without significant inflationary pressure.
Analyze an AD/AS graph showing the economy operating above full employment.
The equilibrium is to the right of the LRAS curve, indicating an inflationary gap. There is upward pressure on prices.
Analyze a graph showing the effect of increased government borrowing on the loanable funds market.
The demand for loanable funds increases, leading to a higher equilibrium interest rate.
Analyze a graph showing the impact of new technology on the PPC.
The PPC shifts outward, indicating an increase in potential output.
Analyze a graph showing the effect of increased investment in human capital on the LRAS.
The LRAS curve shifts to the right, indicating an increase in potential output due to a more productive workforce.
Analyze a graph showing the effect of a decrease in the money supply on aggregate demand.
The aggregate demand curve shifts to the left, decreasing both price level and real GDP in the short run.
Analyze a graph showing the effect of a tax increase on aggregate demand.
The aggregate demand curve shifts to the left, decreasing both price level and real GDP in the short run.
How does expansionary monetary policy apply during a recession?
Lowering interest rates encourages borrowing and spending, shifting AD to the right and stimulating economic activity.
How does contractionary fiscal policy apply during high inflation?
Decreased government spending or higher taxes reduce aggregate demand, helping to cool down the economy and lower inflation.
How does the Phillips Curve relate to monetary policy decisions?
Central banks consider the trade-off between inflation and unemployment when setting interest rates, aiming for a stable economy.
How does increased government borrowing lead to crowding out?
Increased demand for loanable funds raises interest rates, making it more expensive for businesses to invest and consumers to borrow.
How do investments in education promote economic growth?
A more educated workforce is more productive, leading to higher output and a shift of the LRAS curve to the right.
How does a tax cut for businesses potentially lead to economic growth?
Businesses may invest more, increasing output and shifting the LRAS curve to the right. This is a supply-side fiscal policy.
How does increased labor force participation affect the PPC?
It shifts the PPC outward, indicating the economy can produce more goods and services with the increased labor supply.
How does new technology affect the LRAS curve?
New technology increases productivity, shifting the LRAS curve to the right and allowing for greater output at any given price level.
How can fiscal stimulus be used to address an economy operating below full employment?
Increased government spending or tax cuts can increase aggregate demand, moving the economy towards full employment.
How does the quantity theory of money explain inflation?
If the money supply grows faster than real output, the price level will increase, leading to inflation (MV=PQ).
What is the impact of increased government spending on aggregate demand?
It directly increases aggregate demand, leading to higher output and potentially higher prices.
What is the impact of lower interest rates on investment?
Lower interest rates make borrowing cheaper, encouraging businesses to invest more.
What is the impact of a tax cut on consumer spending?
A tax cut increases disposable income, leading to higher consumer spending.
What is the impact of contractionary monetary policy on inflation?
It reduces aggregate demand, helping to cool down the economy and lower inflation.
What is the impact of investing in infrastructure on long-term economic growth?
Improved infrastructure increases productivity and efficiency, leading to higher potential output.
What is the impact of reducing the national debt on future generations?
Lowering the national debt reduces the burden of interest payments on future taxpayers.
What is the impact of increased regulation on business investment?
Increased regulation can increase the cost of doing business, potentially decreasing business investment.
What is the impact of increased government spending on interest rates?
It can increase demand for loanable funds, potentially leading to higher interest rates and crowding out.
What is the impact of increased investment in research and development on economic growth?
It can lead to new technologies and innovations, increasing productivity and shifting the LRAS curve to the right.
What is the impact of supply-side fiscal policies on aggregate supply?
They aim to increase aggregate supply by incentivizing production and investment, often through tax cuts or deregulation.