Econ 2035 Exam 2

Econ 2035 Exam 2 - Exam#2 Macroeconomic activity An...

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Exam #2 Macroeconomic activity: An introduction -Two models 1) Activist (i.e., Keynesian 2) Non-activist (i.e., Monetarist) -Two different models because the macroeconomy of the US is very complex; The market value of the production of goods and services is about $11 trillion (=real GDP), the labor force is over 150,000,000 people. How do we measure macroeconomic growth? (Look at graph in notes) -The percent change in real GDP -If real GDP is shrinking, we are in a recession; if it is increasing, we are in an expansion -In the real world, the unemployment rate tends to in the opposite direction of macroeconomic growth -If the aggregate price level is rising, we know that the inflation rate is positive Aggregate Demand -Activist (i.e., Keynesian) -Foundation: Expenditure approach, national income accounting -y=C+I+G+X-IM -C=Consumption -Goods and services purchased by individuals -I=Investment -Business purchases of goods and services (physical) 1) Business purchases 2) New residential housing 3) Net inventory change -G=Government Spending -Local, state, and federal government purchases of goods and services -X=Exports -IM=Imports -Determinants of quantity of real GDP demanded -Real wealth effect -As the aggregate price level goes down, the nominal value of money does not change, but the real value of money goes up -People are People spend more, and real GDP goes up -Interest rate effect
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money goes down, nominal interest rate decreases, people borrow more, and they spend more -Exchange rate effect -As the aggregate price level decreases, demand for money goes down, nominal interest rate decreases, the US dollar depreciates (Exchange rate decreases), US exports will increase (because they’re cheaper for foreigners), US imports will go down (foreign goods are too expensive), real GDP goes up -Determinants of aggregate demand -Monetary policy -Expansionary (+) -The Fed increases the money supply, people will spend more, aggregate demand increases -The Fed is lowering interest rates through an open market purchase -Contractionary (-) -A Decrease in the money supply, increase in interest rate through an open market sale, people spend less -Fiscal Policy (controlled by the government) -Government spending (+) -An increase in government spending causes aggregate demand to increase -Expansionary fiscal policy action -Net Taxes (-) -Def: Tax revenue – transfers (Govt. unilateral payments to individuals) -If the Govt. decreases net taxes, as an individual you have more income, which means your ability to spend and save will increase -A decrease is an example of expansionary fiscal policy -Expectations -Consumer confidence -In the stability of the economy, the labor market, our income going forward -If you’re working in a factory where layoffs are happening, you’re going to be inclined to save more, to spend less -When consumer confidence increases, people will spend more -Business confidence -If you’re thinking about expanding a business, your decision will be affected if you think that
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This note was uploaded on 07/17/2008 for the course ECON 2035 taught by Professor Stahl during the Summer '08 term at LSU.

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Econ 2035 Exam 2 - Exam#2 Macroeconomic activity An...

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