AP Macroeconomics flashcards

Shift the curves, run the multipliers and catch the common mistakes, topic by topic. Answer out loud, then tap the card to flip it.

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Unit 1: Basic Economic Concepts

Topic 1.1 · Know the termWhat is scarcity, and why does it force choices?

Scarcity means people's wants exceed the limited resources available to meet them. Because most resources are scarce, individuals and societies must decide how to use them, and every use gives up some other use.
Review: 1.1 Scarcity
Topic 1.1 · Spot the mistakeA student says, "Water from the school fountain is free, so it is not scarce." What is wrong?

Free to the drinker is not the same as unlimited. The water, pipes and labor that deliver it have other uses, so using them here gives something up. A resource can be scarce even when the user pays nothing.
Review: 1.1 Scarcity
Topic 1.2 · Work it outOn a straight-line PPC, a country can make 100 cars or 400 bikes, or any combination between. What is the opportunity cost of 1 car?

4 bikes. Giving up all 400 bikes gets 100 cars, so each car costs 400 / 100 = 4 bikes. A straight-line PPC means this cost stays constant.
Review: 1.2 Opportunity Cost and the Production Possibilities Curve (PPC)
Topic 1.2 · Which one fitsWhich shifts a country's PPC outward: (a) unemployed workers find jobs, (b) a new technology raises productivity in both industries, (c) the country moves resources from making tractors to making shoes?

(b). Better technology raises what the economy can produce, which is economic growth. (a) moves production from inside the curve toward it, and (c) is a movement along the curve.
Review: 1.2 Opportunity Cost and the Production Possibilities Curve (PPC)
Topic 1.3 · Work it outIn one day, Ana can make 6 shirts or 3 hats. Ben can make 4 shirts or 4 hats. Who has the comparative advantage in hats?

Ben. A hat costs Ben 1 shirt but costs Ana 2 shirts, so Ben gives up less to make one. Ana has the comparative advantage in shirts: a shirt costs her 0.5 hat and costs Ben 1 hat.
Review: 1.3 Comparative Advantage and Gains from Trade
Topic 1.3 · Check the conditionsFor Lee, 1 loaf of bread costs 2 cakes. For Kim, 1 loaf costs 4 cakes. Lee bakes bread and Kim bakes cakes. What terms of trade make both better off?

Any price for 1 loaf between 2 and 4 cakes, such as 3 cakes. Lee gets more cakes per loaf than a loaf costs him, and Kim gets a loaf for fewer cakes than it would cost her.
Review: 1.3 Comparative Advantage and Gains from Trade
Topic 1.3 · Know the termHow does absolute advantage differ from comparative advantage?

Absolute advantage: producing more of a good than another producer with the same resources. Comparative advantage: producing a good at a lower opportunity cost. Specialization and gains from trade follow comparative advantage.
Review: 1.3 Comparative Advantage and Gains from Trade
Topic 1.4 · Which one fitsConsumer incomes rise, and pizza is a normal good. Does the demand curve for pizza shift, or does the change happen along the curve?

The demand curve shifts right. Income is a determinant of demand. Only a change in pizza's own price causes a movement along the curve.
Review: 1.4 Demand
Topic 1.4 · Spot the mistake"The price of concert tickets rose, so the demand for tickets fell." What is wrong with the wording?

A change in the good's own price changes quantity demanded, a movement along the demand curve. Demand itself shifts only when a determinant such as income changes.
Review: 1.4 Demand
Topic 1.5 · Which one fitsThe price of steel, a key input for bikes, falls. What happens to the supply of bikes?

Supply increases: the supply curve shifts right. Lower input prices make each bike cheaper to produce, so firms offer more bikes at every price.
Review: 1.5 Supply
Topic 1.5 · Spot the mistakeThe price of strawberries rises and nothing else changes. "So the supply of strawberries increased." What is wrong?

Quantity supplied increased, a movement up along the supply curve. Supply itself shifts only when a determinant, such as input prices, changes.
Review: 1.5 Supply
Topic 1.6 · Work it outAt a price of $4, buyers want 300 sandwiches and sellers offer 500. What is the imbalance, and which way will the price move?

A surplus of 200 sandwiches, since 500 minus 300 = 200. Sellers cut prices to move unsold stock, so the price falls toward equilibrium.
Review: 1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium
Topic 1.6 · Say it in contextDemand for electric cars increases while supply stays the same. What happens to equilibrium price and quantity?

Both rise. At the old price there is now a shortage, so the price rises until quantity demanded equals quantity supplied at a larger quantity.
Review: 1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Unit 2: Economic Indicators and the Business Cycle

Topic 2.1 · Work it outConsumption is $600 billion, investment $150 billion, government purchases $200 billion, exports $80 billion and imports $100 billion. What is GDP?

$930 billion. GDP = C + I + G + (exports minus imports) = 600 + 150 + 200 + (80 minus 100) = 930. Net exports are negative here, so they subtract.
Review: 2.1 The Circular Flow and GDP
Topic 2.1 · Which one fitsWhich counts in this year's GDP: (a) a used car sold this year, (b) a new laptop a family buys, (c) steel a carmaker buys and uses in cars it sells this year?

Only (b). GDP counts final output. The used car was counted when it was new, and the steel is an intermediate good already included in the price of the cars.
Review: 2.1 The Circular Flow and GDP
Topic 2.1 · Say it in contextIn the circular flow, why does total spending on final output equal total income?

Every dollar spent on final output is received by someone as income: wages, rent, interest or profit. That is why GDP can be measured by the expenditures approach or the income approach and reach the same total.
Review: 2.1 The Circular Flow and GDP
Topic 2.2 · Which one fitsWhich adds value but is left out of GDP: (a) a parent cooking dinner at home, (b) a restaurant cooking the same dinner for a paying customer?

(a). Home cooking is a nonmarket transaction, so GDP misses it. The restaurant meal is sold in a market and counted.
Review: 2.2 Limitations of GDP
Topic 2.2 · Spot the mistakeCountry X's GDP is twice Country Y's, but X has four times as many people. "So people in X must be better off." What is the main mistake?

It ignores population. Twice the output shared by four times the people is half the output per person. Even per person, GDP leaves out nonmarket production such as household work, so it is a limited measure of well-being.
Review: 2.2 Limitations of GDP
Topic 2.3 · Work it outA country has 200 million adults: 120 million employed, 8 million unemployed and looking for work, and the rest not in the labor force. Find the unemployment rate and the labor force participation rate.

Labor force = 120 + 8 = 128 million. Unemployment rate = 8 / 128 = 6.25%. Participation rate = 128 / 200 = 64%.
Review: 2.3 Unemployment
Topic 2.3 · Which one fitsClassify each: (a) a coal miner whose mine closes for good and whose skills match no open jobs, (b) a graduate searching for a first job, (c) a factory worker laid off because sales fell in a recession.

(a) structural, (b) frictional, (c) cyclical. Frictional plus structural unemployment make up the natural rate; cyclical unemployment comes from the business cycle.
Review: 2.3 Unemployment
Topic 2.3 · Spot the mistakeA jobless worker stops searching because she believes no jobs are available. "Good news, the unemployment rate fell." What is misleading?

She is now a discouraged worker, outside the labor force, so she is no longer counted as unemployed. The rate fell without anyone finding work, which is why the measured rate understates joblessness.
Review: 2.3 Unemployment
Topic 2.3 · Know the termWhat is the natural rate of unemployment?

The unemployment rate when the economy produces full-employment real output. It equals frictional plus structural unemployment, so it is never zero, and it can change gradually as labor force characteristics change.
Review: 2.3 Unemployment
Topic 2.4 · Work it outA fixed basket costs $200 in the base year and $230 this year. What is this year's CPI, and how much have prices risen since the base year?

CPI = (230 / 200) x 100 = 115. Prices have risen 15% since the base year, since (115 minus 100) / 100 = 0.15.
Review: 2.4 Price Indices and Inflation
Topic 2.4 · Work it outYour hourly wage rises from $20 to $22 while the price level rises 10%. What happened to your real wage?

It stayed the same. The wage rose 2 / 20 = 10%, the same as prices, so it buys the same goods as before. A real wage is the nominal wage deflated by the price level.
Review: 2.4 Price Indices and Inflation
Topic 2.4 · Spot the mistake"The CPI rose 3%, so the cost of keeping my standard of living rose exactly 3%." Why might the true rise be smaller?

The CPI prices a fixed basket. When beef gets expensive, shoppers switch to chicken, but the index keeps pricing the beef. This substitution bias makes the CPI overstate true inflation.
Review: 2.4 Price Indices and Inflation
Topic 2.4 · Know the termInflation falls from 6% to 2%. Is that deflation or disinflation?

Disinflation: prices are still rising, just more slowly. Deflation means the price level itself is falling, a negative inflation rate.
Review: 2.4 Price Indices and Inflation
Topic 2.5 · Which one fitsInflation turns out to be 6% when everyone expected 2%. Who gains: a bank that made fixed-rate loans, or its borrowers?

The borrowers. They repay with dollars that buy less than either side expected, so wealth shifts from the lender to them. Unexpected inflation redistributes wealth arbitrarily.
Review: 2.5 Costs of Inflation
Topic 2.5 · Check the conditionsWhen does inflation not shift wealth between lenders and borrowers?

When it is fully expected. Lenders and borrowers build expected inflation into the nominal interest rate, so neither side is surprised. The redistribution comes from inflation that differs from what was expected.
Review: 2.5 Costs of Inflation
Topic 2.6 · Work it outNominal GDP is $1,500 billion and the GDP deflator is 125. What is real GDP?

$1,200 billion. Real GDP = nominal GDP / (deflator / 100) = 1,500 / 1.25 = 1,200.
Review: 2.6 Real v. Nominal GDP
Topic 2.6 · Work it outAn economy makes only pizzas: 100 in the base year at $10 each, and 110 this year at $12 each. Find this year's nominal GDP, real GDP in base-year prices, and GDP deflator.

Nominal = 110 x $12 = $1,320. Real = 110 x $10 = $1,100. Deflator = (1,320 / 1,100) x 100 = 120.
Review: 2.6 Real v. Nominal GDP
Topic 2.7 · Know the termName the two phases and the two turning points of the business cycle.

Phases: expansion and recession. Turning points: the peak, where expansion ends and recession begins, and the trough, where recession ends and expansion begins.
Review: 2.7 Business Cycles
Topic 2.7 · Say it in contextPotential output is $20 trillion and real GDP is $19 trillion. What kind of output gap is this, and how does unemployment compare with the natural rate?

A negative, or recessionary, output gap of $1 trillion. Output is below full employment, so unemployment is above the natural rate; the excess is cyclical unemployment.
Review: 2.7 Business Cycles

Unit 3: National Income and Price Determination

Topic 3.1 · Which one fitsWhich shifts the AD curve: (a) the price level rises, (b) consumers turn pessimistic and spend less at every price level?

(b), a leftward shift. A change in consumption, investment, government spending or net exports not caused by the price level shifts AD. A price level change, (a), is a movement along AD.
Review: 3.1 Aggregate Demand (AD)
Topic 3.1 · Know the termName the three effects that make the AD curve slope downward.

Real wealth effect: a higher price level shrinks what savings can buy. Interest rate effect: it raises interest rates, cutting investment. Exchange rate effect: domestic goods get pricier relative to foreign ones and the currency tends to appreciate, cutting net exports.
Review: 3.1 Aggregate Demand (AD)
Topic 3.2 · Work it outThe MPC is 0.8. Government spending rises by $50 billion. What is the maximum change in real GDP?

An increase of $250 billion. Spending multiplier = 1 / (1 minus MPC) = 1 / 0.2 = 5, and 5 x $50 billion = $250 billion.
Review: 3.2 Multipliers
Topic 3.2 · Work it outThe MPC is 0.75. Taxes are cut by $40 billion. What is the maximum change in real GDP?

An increase of $120 billion. Tax multiplier = MPC / (1 minus MPC) = 0.75 / 0.25 = 3, and 3 x $40 billion = $120 billion.
Review: 3.2 Multipliers
Topic 3.2 · Work it outDisposable income rises by $1,000 and consumer spending rises by $900. Find the MPC, the MPS and the spending multiplier.

MPC = 900 / 1,000 = 0.9. MPS = 1 minus 0.9 = 0.1, because MPC + MPS = 1. Spending multiplier = 1 / 0.1 = 10.
Review: 3.2 Multipliers
Topic 3.3 · Which one fitsOil, an input used across the whole economy, becomes much cheaper. Which curve shifts, and which way?

SRAS shifts right. Lower production costs let firms supply more output at every price level.
Review: 3.3 Short-Run Aggregate Supply (SRAS)
Topic 3.3 · Say it in contextMoving up along a fixed SRAS curve, the price level rises. What happens to output and unemployment?

Output rises, so firms employ more workers, and with the labor force held constant, unemployment falls. That is the short-run trade-off between inflation and unemployment.
Review: 3.3 Short-Run Aggregate Supply (SRAS)
Topic 3.4 · Say it in contextWhy is the LRAS curve vertical at full-employment output?

In the long run wages and prices fully adjust. A higher price level raises firms' costs as much as their revenues, so they do not produce more, and output returns to full employment whatever the price level.
Review: 3.4 Long-Run Aggregate Supply (LRAS)
Topic 3.4 · Know the termIn the AD-AS model, what separates the short run from the long run?

In the short run some input prices, such as wages set by contract, are fixed. In the long run all wages and prices are fully flexible, so there is no long-run trade-off between inflation and unemployment.
Review: 3.4 Long-Run Aggregate Supply (LRAS)
Topic 3.5 · Say it in contextOn an AD-AS graph, AD and SRAS intersect to the right of LRAS. What gap is this, and how does unemployment compare with the natural rate?

A positive, or inflationary, output gap. Output is above full employment, so unemployment is below the natural rate.
Review: 3.5 Equilibrium in the Aggregate Demand–Aggregate Supply (AD–AS) Model
Topic 3.5 · Check the conditionsWhen is an economy in long-run equilibrium in the AD-AS model?

When AD and SRAS intersect on the LRAS curve, at full-employment real output. Short-run equilibrium can sit above, below or at that level.
Review: 3.5 Equilibrium in the Aggregate Demand–Aggregate Supply (AD–AS) Model
Topic 3.6 · Which one fitsThe economy starts in long-run equilibrium. Business confidence collapses and investment falls. In the short run, what happens to real output, unemployment and the price level?

AD shifts left, so real output falls, unemployment rises and the price level falls. The economy is now in a recessionary gap.
Review: 3.6 Changes in the AD–AS Model in the Short Run
Topic 3.6 · Which one fitsStarting from long-run equilibrium, a jump in world oil prices raises costs for most firms. In the short run, what happens to real output and the price level?

SRAS shifts left, so real output falls and the price level rises, and unemployment rises with the drop in output. This is cost-push inflation.
Review: 3.6 Changes in the AD–AS Model in the Short Run
Topic 3.6 · Spot the mistake"Inflation always means aggregate demand increased." What is wrong?

Inflation can also come from supply. Demand-pull inflation is AD shifting right; cost-push inflation is SRAS shifting left. Output tells them apart: it rises with demand-pull and falls with cost-push.
Review: 3.6 Changes in the AD–AS Model in the Short Run
Topic 3.7 · Which one fitsAn economy is in a recessionary gap and the government takes no action. How does it return to full employment in the long run?

Unemployment above the natural rate lets nominal wages and other input prices fall as they adjust. SRAS shifts right until output is back at full employment, at a lower price level.
Review: 3.7 Long-Run Self-Adjustment
Topic 3.7 · Say it in contextThe LRAS curve shifts right. What does that show?

Economic growth: the full-employment level of output has increased. Self-adjustment after an AD or SRAS shock only returns output to the old full-employment level; it does not move LRAS.
Review: 3.7 Long-Run Self-Adjustment
Topic 3.8 · Which one fitsThe economy is in a recessionary gap. Which fiscal policy actions close it, and what do they do to output and the price level?

Expansionary fiscal policy: raise government spending, cut taxes or raise transfers. AD shifts right, so real output and employment rise, and the price level rises too.
Review: 3.8 Fiscal Policy
Topic 3.8 · Spot the mistake"A $10 billion rise in government spending and a $10 billion tax cut raise AD by the same amount." What is wrong?

The spending raises AD more. Government spending is part of AD directly, while a tax cut works indirectly: households save part of it. With an MPC of 0.8, the spending multiplier is 5 and the tax multiplier is 4.
Review: 3.8 Fiscal Policy
Topic 3.8 · Work it outReal GDP is $400 billion below full employment and the MPC is 0.75. Assuming no other changes, how much should government spending rise to close the gap?

$100 billion. Spending multiplier = 1 / (1 minus 0.75) = 4, and 4 x $100 billion = $400 billion.
Review: 3.8 Fiscal Policy
Topic 3.8 · Know the termWhat is discretionary fiscal policy, and why does it come with lags?

A deliberate change in government spending or taxes, such as a new stimulus bill. Deciding on a policy and putting it in place takes time, so it can take effect after conditions have changed.
Review: 3.8 Fiscal Policy
Topic 3.9 · Say it in contextA recession hits. With no new law passed, income tax revenue falls and unemployment benefit payments rise. What are these, and what do they do?

Automatic stabilizers. Lower taxes and higher transfers leave households more disposable income, so consumption falls less than it otherwise would, softening the recession.
Review: 3.9 Automatic Stabilizers
Topic 3.9 · Which one fitsDuring a boom, which is an automatic stabilizer: Congress passing a tax increase, or income tax revenue rising as incomes grow?

Tax revenue rising as incomes grow. It slows consumption with no new decision, helping keep the economy from overheating. A new tax law is discretionary fiscal policy.
Review: 3.9 Automatic Stabilizers

Unit 4: Financial Sector

Topic 4.1 · Say it in contextMarket interest rates rise. What happens to the price of a bond issued last year at a lower fixed rate?

Its price falls. New bonds now pay more, so buyers will take the old bond only at a lower price. Prices of previously issued bonds and interest rates move in opposite directions.
Review: 4.1 Financial Assets
Topic 4.1 · Know the termWhat is liquidity, and what are the most liquid forms of money?

Liquidity is how easily an asset can be used to make payments. Cash and demand deposits, such as checking accounts, are the most liquid. Bonds and stocks earn a return but are less liquid.
Review: 4.1 Financial Assets
Topic 4.2 · Work it outA bank lends at a 7% nominal interest rate. Inflation over the year turns out to be 3%. What real interest rate did the bank earn?

4%. Real interest rate = nominal rate minus actual inflation = 7% minus 3%.
Review: 4.2 Nominal v. Real Interest Rates
Topic 4.2 · Say it in contextExpected inflation rises from 2% to 5%, and lenders still want the same real return. What happens to nominal interest rates?

They rise by about 3 percentage points. Lenders and borrowers set the nominal rate as the expected real rate plus expected inflation, so higher expected inflation shows up in higher nominal rates.
Review: 4.2 Nominal v. Real Interest Rates
Topic 4.3 · Know the termName the three functions of money, with an example of each.

Medium of exchange: paying for lunch with cash. Unit of account: a menu listing prices in dollars. Store of value: keeping $50 in a drawer to spend next month.
Review: 4.3 Definition, Measurement, and Functions of Money
Topic 4.3 · Work it outCurrency in circulation is $200 billion and bank reserves are $150 billion. What is the monetary base?

$350 billion. The monetary base is currency in circulation plus bank reserves.
Review: 4.3 Definition, Measurement, and Functions of Money
Topic 4.4 · Work it outA bank has $1,000 in demand deposits and $250 in reserves. The required reserve ratio is 10%. What are its required and excess reserves?

Required reserves = 10% x $1,000 = $100. Excess reserves = $250 minus $100 = $150. Excess reserves are what the bank can lend.
Review: 4.4 Banking and the Expansion of the Money Supply
Topic 4.4 · Work it outThe required reserve ratio is 20%. Someone deposits $500 of cash in a bank. If banks lend all excess reserves and the public holds no extra cash, what is the maximum new money created by loans?

$2,000. Required reserves are 20% x $500 = $100, so excess reserves are $400. Money multiplier = 1 / 0.2 = 5, and 5 x $400 = $2,000.
Review: 4.4 Banking and the Expansion of the Money Supply
Topic 4.4 · Spot the mistakeWith a 10% reserve requirement, the simple money multiplier is 10. Why does $1 of new reserves usually create less than $10 of money?

The simple multiplier is a maximum. Banks may hold excess reserves instead of lending them, and the public may hold more currency instead of depositing it, so less money is re-lent at each step.
Review: 4.4 Banking and the Expansion of the Money Supply
Topic 4.5 · Which one fitsThe price level rises. Assuming the money supply does not change, what happens to money demand and the nominal interest rate?

Money demand shifts right, because buying the same goods now takes more money. The equilibrium nominal interest rate rises.
Review: 4.5 The Money Market
Topic 4.5 · Say it in contextWhy is the money supply curve drawn vertical in the money market graph?

The central bank determines the monetary base, so the quantity of money supplied does not depend on the nominal interest rate.
Review: 4.5 The Money Market
Topic 4.5 · Say it in contextIn the money market, the nominal interest rate is above equilibrium. What happens next?

People hold more money than they want, a surplus of money. They use it to buy bonds, which pushes bond prices up and the interest rate down until quantity demanded equals quantity supplied.
Review: 4.5 The Money Market
Topic 4.6 · Which one fitsIn a banking system with limited reserves, the central bank wants to close a recessionary gap. Which open market operation should it use, and what follows?

Buy government bonds. Reserves and the money supply rise, the nominal interest rate falls, investment and consumption rise, and AD shifts right, raising real output and the price level.
Review: 4.6 Monetary Policy
Topic 4.6 · Which one fitsIn a banking system with ample reserves, like the US today, the central bank wants to close an inflationary gap. What is its key tool, and which way does it move it?

It raises interest on reserves, its key policy tool. That raises the nominal interest rate, including the overnight rate it targets, so investment and consumption fall and AD shifts left.
Review: 4.6 Monetary Policy
Topic 4.6 · Spot the mistake"With ample reserves, the central bank lowers interest rates by buying bonds to add money to the system." What is wrong?

With ample reserves, changing the money supply does not effectively move the nominal interest rate. The central bank lowers rates by cutting its administered rates, such as interest on reserves. Changing the money supply works with limited reserves.
Review: 4.6 Monetary Policy
Topic 4.6 · Know the termWhat is a central bank's policy rate, and what is it called in the United States?

The overnight interest rate banks charge each other for loans, which many central banks steer into a target range. In the United States it is the federal funds rate.
Review: 4.6 Monetary Policy
Topic 4.7 · Which one fitsHouseholds decide to save more of their income. What happens in the loanable funds market?

The supply of loanable funds shifts right. The real interest rate falls and the equilibrium quantity of loanable funds rises.
Review: 4.7 The Loanable Funds Market
Topic 4.7 · Work it outIn a closed economy, private saving is $500 billion and the government runs a $120 billion budget deficit. What is national saving?

$380 billion. National saving = private saving + public saving, and a deficit is negative public saving: 500 minus 120 = 380.
Review: 4.7 The Loanable Funds Market

Unit 5: Long-Run Consequences of Stabilization Policies

Topic 5.1 · Which one fitsAn economy is in a severe recessionary gap. Which combination of fiscal and monetary policy raises real output?

Expansionary both: raise government spending or cut taxes, and have the central bank lower interest rates. Both shift AD right, so real output and the price level rise.
Review: 5.1 Fiscal and Monetary Policy Actions in the Short Run
Topic 5.1 · Say it in contextIn a limited-reserves system, the government raises deficit spending while the central bank buys bonds. What happens to real output and to the interest rate?

Real output rises, since both actions shift AD right. The interest rate change is indeterminate: the fiscal expansion pushes rates up while the bond purchases push them down.
Review: 5.1 Fiscal and Monetary Policy Actions in the Short Run
Topic 5.2 · Say it in contextThe economy sits on its short-run Phillips curve to the left of the long-run Phillips curve. What does that show?

An inflationary gap. Unemployment is below the natural rate and inflation is higher than at long-run equilibrium; in AD-AS terms, output is above full employment.
Review: 5.2 The Phillips Curve
Topic 5.2 · Which one fitsStarting from long-run equilibrium, AD increases. How does that show up on the Phillips curve graph?

As a movement up and to the left along the SRPC: inflation rises and unemployment falls. Demand shocks move the economy along the SRPC rather than shifting it.
Review: 5.2 The Phillips Curve
Topic 5.2 · Which one fitsA negative supply shock raises costs across the economy. What happens to the short-run Phillips curve?

The SRPC shifts right: at every unemployment rate, inflation is higher. Supply shocks shift the SRPC instead of moving the economy along it.
Review: 5.2 The Phillips Curve
Topic 5.2 · Check the conditionsWhere is the long-run Phillips curve, and what makes it shift?

It is vertical at the natural rate of unemployment, so there is no long-run trade-off. It shifts only when the natural rate changes, for example from changes in labor force characteristics.
Review: 5.2 The Phillips Curve
Topic 5.3 · Work it outThe money supply grows 15% a year while real output grows 2% a year. Using the quantity theory of money with constant velocity, about what is the inflation rate?

About 13%. From MV = PY with V constant, money growth is roughly inflation plus real output growth, so inflation is about 15% minus 2%.
Review: 5.3 Money Growth and Inflation
Topic 5.3 · Spot the mistakeThe economy is at full employment. "Printing more money will raise real output for good." What is wrong?

At full employment, changes in the money supply have no effect on real output in the long run. Sustained rapid money growth only raises the price level, which is inflation.
Review: 5.3 Money Growth and Inflation
Topic 5.4 · Work it outA government collects $4.0 trillion in taxes, spends $4.3 trillion on purchases and pays $0.5 trillion in transfers. What is its budget balance, and what happens to the national debt?

A deficit of $0.8 trillion: tax revenue minus (purchases plus transfers) = 4.0 minus (4.3 + 0.5) = minus 0.8. The national debt rises as the government borrows to cover the deficit.
Review: 5.4 Government Deficits and the National Debt
Topic 5.4 · Know the termHow is a budget deficit different from the national debt?

A deficit is one year's shortfall of tax revenue below government purchases plus transfers. The national debt is the total built up by past deficits. Interest owed on that debt adds to it and uses funds that could go elsewhere.
Review: 5.4 Government Deficits and the National Debt
Topic 5.5 · Which one fitsThe government raises deficit spending and borrows to finance it. Using the loanable funds market, what happens to the real interest rate and private investment?

The real interest rate rises and interest-sensitive private investment falls: crowding out. Government borrowing is usually drawn as more demand for loanable funds; some texts draw it as less supply, since public saving falls. Either way the rate rises.
Review: 5.5 Crowding Out
Topic 5.5 · Say it in contextWhy can crowding out slow long-run economic growth?

Less private investment means fewer new machines and buildings. A lower rate of physical capital accumulation slows productivity growth, so the economy grows more slowly.
Review: 5.5 Crowding Out
Topic 5.6 · Work it outReal GDP rises from $400 billion to $441 billion while population grows from 40 million to 42 million. What is the growth rate of real GDP per capita?

5%. Per capita real GDP goes from 400 billion / 40 million = $10,000 to 441 billion / 42 million = $10,500, and 500 / 10,000 = 0.05.
Review: 5.6 Economic Growth
Topic 5.6 · Know the termWhat is labor productivity, and what determines it?

Output per employed worker. It depends on the level of technology and on physical capital and human capital per worker.
Review: 5.6 Economic Growth
Topic 5.6 · Say it in contextHow does an outward shift of the PPC show up on the AD-AS graph?

As a rightward shift of LRAS. Both curves mark maximum sustainable capacity: the output produced when all resources are fully employed.
Review: 5.6 Economic Growth
Topic 5.7 · Which one fitsA government wants faster long-run growth in real GDP per capita. Which fits better: funding roads and broadband, or a one-time tax rebate check?

Funding roads and broadband. Infrastructure and technology raise productivity and shift LRAS right. A one-time rebate mainly raises AD in the short run.
Review: 5.7 Public Policy and Economic Growth
Topic 5.7 · Say it in contextA government cuts taxes on business investment to get firms to buy new equipment. What kind of policy is this, and which curves can it shift?

A supply-side fiscal policy. By changing incentives, it can raise AD in the short run through more investment, and raise aggregate supply and potential output as the new capital adds to capacity.
Review: 5.7 Public Policy and Economic Growth

Unit 6: Open Economy—International Trade and Finance

Topic 6.1 · Which one fitsClassify each for the United States: (a) a US firm exports software to Japan, (b) a German investor buys US Treasury bonds.

(a) a credit in the current account: an export brings money in. (b) a credit in the capital and financial account: a foreign purchase of a US asset is a financial capital inflow.
Review: 6.1 Balance of Payments Accounts
Topic 6.1 · Work it outA country's current account shows a $60 billion deficit. What must its capital and financial account show?

A $60 billion surplus. The current account and the capital and financial account sum to zero, so a current account deficit is matched by a net financial capital inflow of the same size.
Review: 6.1 Balance of Payments Accounts
Topic 6.1 · Know the termWhat does the balance of payments record, and what are its two parts?

All of a country's international transactions over a period. The current account records net exports, net income from abroad and net transfers; the capital and financial account records purchases and sales of assets between countries.
Review: 6.1 Balance of Payments Accounts
Topic 6.2 · Say it in contextThe exchange rate moves from 1 dollar = 100 yen to 1 dollar = 125 yen. Did the dollar appreciate or depreciate?

The dollar appreciated: each dollar now buys more yen. The yen depreciated, since 1 yen now buys $0.008 instead of $0.01.
Review: 6.2 Exchange Rates
Topic 6.2 · Work it out1 euro = $1.25. How many euros does $1 buy, and what does a $50 item cost in euros?

$1 buys 1 / 1.25 = 0.8 euro. The $50 item costs 50 x 0.8 = 40 euros.
Review: 6.2 Exchange Rates
Topic 6.3 · Say it in contextWhy does the demand curve for euros, priced in dollars, slope downward?

Euros are demanded to buy euro-area goods, services and assets. When a euro costs fewer dollars, those goods and assets are cheaper to Americans, so they want more euros.
Review: 6.3 The Foreign Exchange Market
Topic 6.3 · Know the termIn the foreign exchange market for dollars, who supplies dollars?

Anyone holding dollars who must pay in another currency, such as US importers buying foreign goods and US investors buying foreign assets. Supplying dollars means trading them for foreign currency.
Review: 6.3 The Foreign Exchange Market
Topic 6.4 · Which one fitsTourists from Europe flock to the United States. In the foreign exchange market for dollars, what shifts, and what happens to the dollar?

Demand for dollars shifts right, because Europeans need dollars to pay for US goods and services. The dollar appreciates against the euro.
Review: 6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Topic 6.4 · Which one fitsThe United States puts new tariffs on Chinese goods, and Americans buy fewer of them. In the market for dollars, what shifts, and what happens to the dollar against the yuan?

The supply of dollars shifts left, since Americans trade fewer dollars for yuan to pay for Chinese goods. The dollar appreciates against the yuan.
Review: 6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Topic 6.4 · Which one fitsThe US central bank raises its policy rate, lifting US interest rates above those abroad. Holding everything else equal, what happens to the dollar?

It appreciates. Higher US interest rates make US financial assets more attractive, so foreign demand for dollars rises.
Review: 6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Topic 6.5 · Which one fitsThe dollar appreciates. What happens to US exports, imports and net exports?

Exports fall and imports rise, so net exports fall. US goods cost more to foreigners and foreign goods cost less to Americans. Lower net exports shift US AD left.
Review: 6.5 Changes in the Foreign Exchange Market and Net Exports
Topic 6.5 · Say it in contextMexico's peso depreciates against the dollar. What happens to Mexico's net exports and aggregate demand in the short run?

Net exports rise: Mexican goods are cheaper abroad and imports cost Mexicans more. AD shifts right, raising Mexico's real output, employment and price level.
Review: 6.5 Changes in the Foreign Exchange Market and Net Exports
Topic 6.6 · Which one fitsReal interest rates in Canada rise relative to the United States. Which way does financial capital flow, and what happens to the Canadian dollar?

Capital flows into Canada, toward the higher real return. Foreigners demand more Canadian dollars to buy Canadian assets, so the Canadian dollar appreciates.
Review: 6.6 Real Interest Rates and International Capital Flows
Topic 6.6 · Say it in contextA central bank lowers its domestic interest rate while foreign rates stay the same. What happens to net capital inflows and to its currency?

Net capital inflows fall, because domestic assets now pay less than foreign ones. Demand for the currency falls, so it depreciates.
Review: 6.6 Real Interest Rates and International Capital Flows