Macroeconomics Principles
The Loanable Funds Market
The actions of borrowers and lenders are coordinated by the interest rate in the loanable funds market.
Short-Run Aggregate Supply
If resource prices are fixed and the product selling price rises, then profits will increase. If the actual price level is lower than the expected price level reflected in long-term contracts, many firms will find production less profitable than they had expected and will decrease the quantity of output supplied. Conversely, if the price level in the current period is higher than what buyers and sellers anticipated, profit margins will be attractive and firms will expand output.
The short-run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will cause firms to expand output since the higher product prices will improve profitability.
Aggregate Demand and Aggregate Supply Model
In the aggregate demand and aggregate supply model, the upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy’s price level and GDP.
The Foreign Exchange Market
In the foreign exchange market, the price of one nation’s currency in terms of the currency of another nation is known as the exchange rate.
Shifts in Aggregate Supply
Other things constant, if the cost of labor goes down, the profits of firms will increase, and short-run aggregate supply will shift to the right.
Long-Run Aggregate Supply
The vertical long-run aggregate supply curve reflects the fact that in the long run, an increase in the price level will not alter the economy’s maximum sustainable rate of output. An increase in the long-run aggregate supply curve indicates that potential real GDP has increased.
Circular Flow of Income
Which of the following best characterizes the circular flow of income? Businesses buy resources from households, and households use their income to buy goods and services from businesses.
Real Output and GDP
Within the aggregate demand/aggregate supply framework, the quantity produced and purchased in the goods and services market represents real output or real GDP.
Impact of Aggregate Demand on Output and Prices
How will an unanticipated decrease in aggregate demand influence equilibrium output in the goods and services market? Output will decrease, and the general level of prices will fall.
Effects of Currency Depreciation
If a currency depreciates, a country’s net exports rise and AD increases.
Impact of Unanticipated Aggregate Demand Increase
If there is an unanticipated increase in aggregate demand, which of the following is most likely to occur? An increase in employment
Importance of Expected Price Level
The expected price level is important because firms and resource owners make long-term agreements based on the expected price level.
Factors Increasing Aggregate Demand
Which of the following factors would increase aggregate demand in the goods and services market? Increased optimism on the part of consumers and businesses
Factors Shifting Aggregate Supply
Which of the following shifts both short-run and long-run aggregate supply to the left? A decrease in the capital stock
Which of the following will most likely accompany an unanticipated increase in short-run aggregate supply? An increase in real GDP
Which of the following will most likely increase aggregate supply in the long run? An increase in the rate of capital formation
Factors Reducing Aggregate Demand
Which of the following would be most likely to cause a reduction in current aggregate demand in the United States? Increased fear of a recession
Interest Rates During Recessions
During recessions, interest rates tend to fall because business borrowing for investment purposes tends to fall during recessions.
Self-Correcting Mechanism in Market Economies
If a market economy has a self-correcting mechanism, when output is lower than potential or full-employment output, changes will occur that will automatically guide the economy back to full employment.
Impact of Unanticipated Aggregate Demand Changes
If an economy was initially in long-run equilibrium, an unanticipated increase in aggregate demand will tend to cause a temporarily high level of output and employment that cannot be maintained.
If an unanticipated decrease in aggregate demand results in an output below the economy’s long-run capacity, long-run equilibrium will eventually be restored by lower resource prices and lower real interest rates.
If an unanticipated reduction in aggregate demand throws a market economy into a recession, lower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.
Impact of Economic Growth on Net Exports
If European economies experience strong economic growth, U.S. net exports will likely increase.
Output and Unemployment
When the output of an economy exceeds the economy’s full-employment capacity, the actual rate of unemployment will be less than the natural rate.
Factors Affecting Aggregate Demand and Interest Rates
Which of the following will cause an increase in aggregate demand within the AS/AD model? A decrease in the real interest rate
Real Interest Rates
A positive real interest rate indicates how fast the purchasing power of your savings account is rising over time.
Nominal and Real Interest Rates
Arnold puts money into an account. One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods. The nominal interest rate was 5 percent and the inflation rate was -1 percent.
Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent. Gladys earned a real rate of return of negative 2%.
If a lender expects inflation to be 5 percent, and after a loan is made, actual inflation is 10 percent, which of the following will be true? The lender will receive a lower real interest rate than he expected.
If the expected rate of inflation is zero, the real interest rate must be equal to the money (nominal) interest rate.
Shortage of Loanable Funds
, then
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
-Suppose the nominal interest rate was 5 percent and the inflation rate was 3.5 percent.
The dollar value of savings increased at 5 percent, and the value of savings measured in goods increased at 1.5 percent.
-The money interest rate may be a misleading indicator of real borrowing costs when
the inflation rate is high.
-The resource market involves transactions dealing with
labor services, natural resources, and physical capital
-When an economy is in long run equilibrium
the interest rate will decline.
-Which of the following equations is accurate?
money interest rate = real interest rate-inflationary premium
-Which of the following groups would most likely benefit from unanticipated inflation?
Borrowers
-You just bought a $1,000 bond that is scheduled to mature in ten years. If interest rates rise during the next six months, the market value (or price) of your bond will
decrease