Download Sec 2.2 Review Questions

IB Economics, Section 2.2, Macro
Tragakes Ch. 9 Review Questions: AS-AD and the Multiplier
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Define aggregate demand.
List the determinants that could cause consumer spending to increase or
decrease aggregate demand. Give an example of each.
What does investment mean in economics?
List the determinants that could cause investment spending to increase or
decrease aggregate demand. Give an example of each.
List the determinants that could cause government spending to increase or
decrease aggregate demand. Give an example of each.
List the determinants that could cause net export spending to increase or
decrease aggregate demand. Give an example of each.
For each headline: a) explain exactly how it impacts C, I, G, or X-M, b) graph
the result on an AD/AS diagram, c) show the result in price level and real GDP.
o Wall Street in Panic as Stocks Crash
o Democrats Increase Health Care Coverage
o Construction Spending Hits a 5-Year Low
o Interest Rates Tumble After Fed Acts Again
o Longtime Tax Breaks May Get Booted By The Budget
o Can the US Dollar Hold Its Gains?
Define aggregate supply in the short run.
What, for the macroeconomy, distinguishes the short-run from the long-run?
List the major determinants of short-run aggregate supply.
List the major determinants of long-run aggregate supply
For each headline: a) decide whether it increases or decreases costs, b)
graph the result on an AD/AS diagram, c) show the result in price level and
real GDP.
o Diesel and Oil Prices Drop
o Lower Minimum Wage Would Boost Teen Hiring
o Pakistani Government to Increase Corporate Tax Rate in Budget
o New Sewage Regulations Protect Human Health and the Environment
o Japan Factories in Severe State: Tsunami Disrupts Supply Chains
13. What is an inflationary gap? Why does it exist?
14. What is a recessionary gap? Why does it exist?
15. Explain step by step, with a graph, how the new-classical economists believe
the macroeconomy finds equilibrium after: a.) an increase in AD b.) a
decrease in AD.
16. Differentiate between LRAS and SRAS.
17. Why do Classical economists believe the economy will always return to long-run
equilibrium automatically?
18. Draw the AS-AD diagram from a Keynesian perspective noting the 3 sections
of the LRAS curve.
19. How do Keynesians think the economy gets “stuck?”
20. Why is the flat section flat and the vertical section vertical on the Keynesian
model?
21. What factors will shift LRAS?
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What key phrase describes the multiplier effect?
Define the marginal propensity to consume.
What are the three components of the marginal propensity to withdraw?
How is the spending multiplier calculated?
The government spends $3 billion on police cars. Explain why aggregate
demand might increase by more than $3 billion.
Economists observe that an increase in government spending of $10 billion
raises the total demand for goods and services by $30 billion. Calculate the
multiplier, MPW, and MPC.
By how much will GDP change if firms increase their investment by $8 billion
and the MPC is 0.80? If the MPW is 0.33?
Suppose that a certain country has an MPC of 0.9 and a real GDP of $400
billion. If its investment spending decreases by $4 billion, what will be its new
level of real GDP?
If C = $100, I = $50, X–M = –$10, and G = $30, what is the economy’s
equilibrium GDP? If Yfe output is $200, what is the current macroeconomic
situation?
The MPC for Question 23 is 0.65. What should the government do to reach
macroeconomic equilibrium?