ECON 103 FINAL EXAM STUDY GUIDE QUESTIONS AND ANSWERS GRADED A

Final Exam Study Guide Mixing of chapters to put things together: A short-run equilibrium (SRE) is an intersection between which curves? AD & SRAS A long-run equilibrium (LRE) is an intersection between which curves? AD & SRAS & LRAS (resources institutions technology) (Classify these points as short run equilibriums, long run equilibriums, recessions, and/or overheated economies and make up unemployment rates for each point) At A the economy is at Recession (UU=5%) (U=7%) (U=17%) At B the economy is LRE (U=5%) At C the economy is Overheated (uu*) At D the economy is LRE (u=5%) AD=GDP=C+I+G+Ex-Im(go back and check out chapter 6 for details) What are some signs that the economy is in a recession: yy* & uu* What are some signs that the economy is overheated: yy* & uu* ECON 103 FINAL EXAM STUDY GUIDE QUESTIONS AND ANSWERS GRADED A Initial Moves: List the reasons that a curves might shift and give an situation as an example and explain which way the curve would shift for it. AD: 1. Real wealth goes up: AD shifts right 2.Expected Future Income goes up: AD shifts right 3. Expected prices in the future go up: AD shifts right 4. Foreign Income goes up: AD shifts right 5. Currency becomes more valuable, our currency goes up in foreign currency , imports go up, our exports go down, NX goes down: AD shifts left LRAS: 1.Resources go up: LRAS shifts right 2. Technology go up: LRAS shifts right 3. Institutions become more business friendly go up: LRAS shifts right SRAS: 1.Sticky Input Prices: PL goes up: SRAS goes up 2. Menu Costs: PL goes up: SRAS goes down 3. Money Illusion : PL goes down: SRAS goes down Return to LRE: What are the three options for how the economy can return to LRE from a SRE? Which curve to they effect? 1. Do Nothing (Wait for Prices /Wages to Adjust) SRAS 2. Fiscal Policy (Gov Spending or taxes) AD 3. Monetary Policy (Interest Rates - Investments) AD In chapter 13, when the economy is not in LRE, there was no fiscal or monetary policy used, so the SRAS curve adjusts to bring the economy back to LRE. In Chapter 13 when the economy got in a recession (so not in long run equilibrium), the SRAS curve would move RIGHT over time to bring the economy back into LRE. This would happen because the HIGH unemployment rate would cause people to be willing to work for LESS . When wages FALL employers’ profit margins INCREASE giving them MORE incentives to produce. In Chapter 13 when the economy got overheated, the SRAS curve would move LEFT over time to bring the economy back into LRE. This would happen because the LOW unemployment rate would cause firms to struggle to find people to hire requiring them to pay MORE . When wages INCREASE , employers’ profit margins DECREASE giving them LESS incentives to produce. In chapter 16, when the economy is not in LRE the government uses fiscal policy which moves the AD curve to restore the LRE. In chapter 18, when the economy is not in LRE the federal reserve uses monetary policy which moves the AD curve to restore LRE. Expansionary Fiscal & Monetary Policy both move the AD curve to the RIGHT This will always cause GDP to INCREASE and PL to INCREASE in the short run. Contractionary Fiscal & Monetary Policy both move the AD curve to the LEFT This will always cause GDP to FALL and PL to FALL in the short run. If the economy will adjust to LRE on its own, why would the government/Federal Reserve want to use fiscal/monetary policy instead? Chapter 16: Fiscal Policy In expansionary fiscal policy, taxes decrease and/or spending increases. Deficits then increase. In contractionary fiscal policy, taxes increase and/or spending decrease . Deficits then decrease. Fill out the following table about how the government should use the two tools of fiscal policy to improve the economy depending on the state of the economy: Adjust AD=C+I+G+Ex-Im - Expansionary Fiscal Policy= Deficit will increase - Contractionary Fiscal Policy= Deficit will decrease Describe how the spending multiplier works. M^s What is the spending multiplier equation: What are some shortcomings of Fiscal Policy? Symptoms: Expansionary: Inflation, Increases deficit 1. There are lags. Describe the three lags: 1. Recognition Lag: UE da