AP Macro Unit 3

Interest Rate Effect

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Foreign Trade Effect

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Keynesian Theory

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Inflationary Gap

• Output is low and unemployment is more than NRU. Actual GDP is below potential GDP.

• Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)

• Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

• A gap with higher prices and a decrease in GDP

• Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Check all that apply: Which THREE graphs show the Money Market?

• Graph B

• Graph A

• Graph C

• Graph D

• Graph AB

The formula C+I+G+X represents ​ (a)   .

• Gross Domestic Product

• Nominal Imports

• Nominal Exports

• Gross International Product

It is the study of the nations economy as a whole.

• Microeconomics

• National economy

• National output

• Macroeconomics

The belief the government must manage the economy by spending more money when in a recession and cutting spending when there is inflation.

• Keynesian Economics

• Supply-Side Economics

The expenditure by households on consumption goods and services.

• Business Cycle

• Exports of goods and services

• Consumption expenditure

• Government expenditure on goods and services

This country’s NRU is 6%. What is their targeted inflation rate?

• 5%

• 2%

• 3%

• 4%