10.2: Aggregate Demand and Supply

Question 1

Aggregate demand is…

Answer 1

The quantity of goods and services that households, businesses, government, and non-domestic customers want to buy at any given level of prices.

Question 2

Aggregate supply is…

Answer 2

The quantity of goods and services producers are willing to supply at any given level of price.

Question 3

Aggregate demand curve is an…

Answer 3

Inverse relationship between the price level and real output.

Question 4

1. The wealth effect is when an increase (decrease) in … increases (decreases) … out of a given level of current income.

Answer 4

The wealth effect is when an increase (decrease) in household wealth increases (decreases) consumer spending out of a given level of current income.

Question 5

2. The interest rate effect is the effect through which … , through demand for money, impact interest rate, which in turn impacts ….

Answer 5

The interest rate effect is the effect through which price level changes, through demand for money, impact interest rate, which in turn impacts investment and consumption.

Question 6

3. Real exchange rate effect is the effect through which … impacts real exchange rate which in turn impacts net …

Answer 6

Real exchange rate effect is the effect through which changing price level impacts real exchange rate which in turn impacts net exports and aggregate demand.

Question 7

The long-run equilibrium level of output (vertical line), is referred to…

Answer 7

As the full employment, or natural level of output.

Question 8

Potential GDP is the maximum amount of … an economy can sustainably produce without inducing …

Answer 8

Potential GDP is the maximum amount of output an economy can sustainably produce without inducing an increase in the inflation rate.