TAMU ECON 203 EXAM 2 EXAM STUDY GUIDE 2026 PRACTICE QUESTIONS

TAMU ECON 203 EXAM 2 EXAM STUDY GUIDE
2026 PRACTICE QUESTIONS

◉ Keynesian equilibrium: Answer: when PAE=Y


◉ Y vs. PAE: assume demand is higher than anticipate Answer: -
firms draw down inventories.
-actual inventories < planned inventories (Y<PAE).
- firms increase production in order to increase inventories to the
planned levels.


◉ Y vs. PAE: Assume demand is lower than anticipated Answer: -
firms end up with a higher inventories than planned (Y>PAE).
-firms decrease production in order to return inventories to the
planned levels.


◉ Y>PAE Answer: decrease in Y


◉ Y<PAE Answer: increase in Y


◉ recessionary output gap Answer: Occurs when equilibrium
aggregate expenditure is below the level needed for full employment

, ◉ Inflationary Output Gap Answer: occurs when equilibrium
aggregate expenditure is above the level needed for full
employment.


◉ Aggregate Demand: price (P) Answer: overall price level
(weighted average of prices of all goods and services)


◉ Aggregate Demand: total output (Y) Answer: GDP


◉ Aggregate Demand Curve Answer: shows the relationship
between the overall price level in the economy(P) and output(Y)


◉ Why does AD curve slope downwards? Answer: -Wealth effect
(consumption)
-Interest rate effect (Investment)
-Foreign purchases effect (Net exports (NX))


◉ Wealth Effect (Consumption) Answer: as prices rise, real wealth
decreases and people reduce consumption


(if wages increase in proportion to price, then wealth does not
increase)