Download APE Unit 4 -Guided Reading Packet

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APE Macro Unit 4: Measurement of Economic Performance
Guided Reading Packet #4
Objectives: These are the key concepts that you must be able to answer after Unit 4.
Chapter 25-26:
 Explain how long-run growth can be measured by the increase in real GDP per capita, how this measure has changed over
time, and how it varies across countries.
 Explain why productivity is the key to long-run growth and how productivity is driven by physical capital, human capital,
and technological progress.
 Understand the factors that explain why growth rates differ so much among countries.
 How growth has varied among several important regions of the world and why the convergence hypothesis applies to
economically advanced countries, but only conditionally to many poorer countries.
 Explain the relationship between savings and investment spending.
 Understand and explain the aspects of the loanable funds market, which shows how savers are matched with borrowers.
 Explain the purpose of the four principal types of financial instruments: stocks, bonds, loans, and bank deposits.
 Explain how financial intermediaries help investors overcome the problems of high transactions costs, risk, and the need for
liquidity.
 Analyze some competing views of what determines stock prices and why stock market fluctuations can be a source of
macroeconomic instability.
Chapter 27-28:
 Explain how the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of
aggregate output supplied by the economy.
 Explain why the aggregate supply curve is different in the short run as compared to the long run.
 Explain how the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of
aggregate output demanded in the economy.
 Understand and explain the importance of the multiplier.
 Illustrate how the AS-AD model is used to analyze economic fluctuations.
 Explain how the economy tends to self-correct in the long run.
 Explain how monetary policy and fiscal policy can be used to try to stabilize the economy in the short run.
 Understand the factors that cause the AD curve to shift to the right (non-change in price level).
Chapter 29:
 Explain what fiscal policy is and why it is an important tool in managing economic fluctuations.
 Explain which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy.
 Explain why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers.
 Explain why tax and transfer multipliers are less than the government purchases multipliers.
Chapter 25 Vocabulary: Rule of 70, labor productivity, physical capital, human capital, technology, aggregate production
function, diminishing returns to physical capital, growth accounting, total factor productivity, infrastructure, research and
development, convergence hypothesis. (12)
Chapter 26 Vocabulary: savings-investment spending identity, budget surplus, budget deficit, budget balance, national savings,
capital inflow, loanable funds market, interest rate, rate of return, crowding out, (household) wealth, financial asset, physical asset,
transaction costs, financial risk, diversification, liquid, illiquid, loan, financial intermediary, mutual fund, pension plan, bank deposit,
bank, efficient markets hypothesis. (25)
Chapter 27 Vocabulary: aggregate supply curve, nominal wage, short-run aggregate supply curve, long-run aggregate supply
curve, potential output, aggregate demand curve, marginal propensity to consume (MPC), marginal propensity to save (MPS),
multiplier, AS-AD model, short-run macroeconomic equilibrium, short-run equilibrium aggregate price level, Short-run equilibrium
aggregate output, supply shock, stagflation, demand shock, long-run macroeconomic equilibrium, recessionary gap, inflationary gap,
self-correcting. (20)
Chapter 28 Vocabulary: consumption function, aggregate consumption function, accelerator principle, inventories, inventory
investment, unplanned inventory investment, actual investment spending, planned aggregate spending, income-expenditure
equilibrium, income-expenditure equilibrium GDP, Keynesian cross. (12)
Chapter 29 Vocabulary: social insurance, expansionary fiscal policy, contractionary fiscal policy, automatic stabilizers,
discretionary fiscal policy, cyclical adjusted budget balance, fiscal years, public debt, debt-GDP ratio, implicit liabilities. (10).
Homework Assignments:
Chapter 25 Materials
Vocabulary
 Chapter 25 Vocabulary Notecards
Textbook:
 Chapter 25: Long-Run Economic Growth (pp. 586-609)
Chapter 26 Materials
Vocabulary
 Chapter 26 Vocabulary Notecards
Textbook
 Chapter 26: Savings, Investment Spending and the Financial System (pp. 610-635)
Chapter 25/26
Combined Quizzes
Vocab Quiz:
Chapter Quiz:
Chapter 27 Materials
Vocabulary
 Chapter 27 Vocabulary Notecards
Textbook
 Chapter 27: Aggregate Supply and Aggregate Demand (pp. 636-668)
Chapter 28 Materials
Vocabulary
 Chapter 28 Vocabulary Notecards
Textbook:
 Chapter 28: Income and Expenditure (pp. 669-692)
Chapter 29 Materials
Vocabulary
 Chapter 29 Vocabulary Notecards
 Vocab Quiz:
Textbook
 Chapter 29: Fiscal Policy (pp. 693-720)
 Chapter 29 Quiz: N/A  part of the Unit 4 Test
Extra Unit Practice:
 Krugman/Wells website – animated graph tutorials at www.worthpublishers.com/krugmanwells
 ACDCLeadership.com: -Our units are based on Mr. Clifford’s work  check his site out!
Unit 4 Test –
Unit 4 General Problem Sets: Answer these on this sheet of paper unless otherwise noted.
Key Concepts
1. Define and explain each concept and give specific examples:
 The Multiplier Effect and spending multiplier

Crowding Out

A Built-in Stabilizer
Chapter 27/28
Combined Quizzes
Vocab Quiz:
Chapter Quiz:
Fiscal Policy
1. Explain the difference between expansionary and contractionary fiscal policies. Explain their goals and give specific
examples.
2.
To support your answer in part a, draw a recessionary gap and an inflationary gap. Draw and explain how fiscal policy is
used to close the gaps using accurate numbers.
Aggregate Demand and Aggregate Supply
1. Define and give examples of the determinants of aggregate demand.
2.
Define and give examples of the determinants of aggregate supply.
3.
Define sticky vs. flexible wages and prices.
4.
Graph the following curves (on the same graph): AD, SRAS and LRAS. Make sure to correctly label the axes.
Macroeconomic Equilibrium
1. What causes each of the following?
 An increase in AD?

A decrease in AD?

An increase in AS?

A decrease in AS?
AD , AS, and LRAS*
Draw the economy at full employment
Price Level
Short Run vs. Long Run Aggregate Supply*
1. In the short run,
2. In the long run,
Shifters of AD and AS
Shifters of Aggregate Demand
1. _______________
3. _______________
2. _______________
4. _______________
Real GDP
Shifters of Aggregate Supply
1. _______________
3. _______________
2. _______________
4. _______________
Recessionary Gap*
Draw the economy in a recession
Price Level
Inflationary Gap*
Draw the economy beyond full employment
Price Level
Real GDP
Real GDP
Classical vs. Keynesian*
Draw and label the three ranges of the AS curve
Price Level
Fiscal Policy
Discretionary Fiscal Policy-
Non-Discretionary Fiscal Policy-
Real GDP
Government Spending and Taxation
Expansionary Fiscal Policy1.
2.
Contractionary Fiscal Policy1.
2.
Short Run and Long Run Phillips Curve*
Draw and label the short and long run Phillips curve. Label points A, B, and C based on the changes in AD
Price Level
LRAS
Phillips Curve
AS
B
PL1
PL
A
PL2
C
AD1
AD2
AD
QY
Real GDP
Draw and label the short and long run Phillips curve and label point A.
Show the result of a negative supply shock on both graphs
LRAS
Phillips Curve
AS
Price Level
PL
A
AD
QY
Price Level
LRAS
PL
$60
1. Deficit Spending2. Time Lags3. Crowding out-
$100
Real GDP
Spending Multiplier Practice*
1. What type of gap?
AS
2. To close the gap the government could
________ spending or ________ taxes on consumers
Assume the MPC is .5:
3. How much should the government increasing
spending to close the gap?
4. How much should the government cut taxes to close
the gap?
Now assume that the MPC is .8:
5. How much should the government increasing
AD
spending to close the gap?
6. How much should the government cut taxes to close
Real GDP (billion) the gap?
Problem with Fiscal Policy