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MACRO: Concepts and Models Flashcards

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  1. Which of the following best describes the difference between the short-run and long-run aggregate supply curves?

    Answer: The SRAS is upward sloping due to sticky wages; the LRAS is vertical at potential output

    The SRAS slopes upward because wages and some prices are sticky in the short run; the LRAS is vertical because all prices adjust in the long run.

  2. A recessionary gap in the AD-AS model occurs when:

    Answer: Actual GDP falls short of potential GDP

    A recessionary gap exists when the economy's actual output is below its potential (full-employment) level, indicating unused resources.

  3. In the AD-AS model, stagflation is characterized by:

    Answer: Falling output and rising prices simultaneously

    Stagflation occurs when a negative supply shock shifts SRAS left, causing output to fall and the price level to rise at the same time.

  4. In the loanable funds market model, an increase in the government budget deficit tends to:

    Answer: Increase the demand for loanable funds and raise interest rates

    A larger budget deficit increases government borrowing, raising the demand for loanable funds and pushing the real interest rate up, which crowds out private investment.

  5. In the money market model, the Federal Reserve increases the money supply, which will most directly cause:

    Answer: The nominal interest rate to fall

    An increase in money supply shifts the supply of money rightward in the money market, lowering the equilibrium nominal interest rate.

  6. The concept of 'crowding out' in macroeconomics refers to:

    Answer: Government borrowing raising interest rates and reducing private investment

    Crowding out occurs when government deficits raise interest rates, making borrowing more expensive and reducing private-sector investment spending.

  7. Which model is used to determine the equilibrium real interest rate and equilibrium quantity of borrowing and lending?

    Answer: Loanable funds market model

    The loanable funds market model shows how the real interest rate equates the supply of savings with the demand for borrowing.