3. Aggregate Supply/Demand

Question 1

• Macroeconomy, final goods/services
• P: price level (GDP Def.)
• Y: RGDP, output

Answer 1

Aggregate S/D

Question 2

Decrease buying/selling

Answer 2

Left Shift

Question 3

Increase buying/selling

Answer 3

Right Shift

Question 4

Amount of g/s consumers are willing to buy at certain price levels
- Inverse relationship between price/quantity
- Consumers will buy more if prices decreases, vice versa

Answer 4

Aggregate Demand (AD)

Question 5

1) International Substitution Effect: as prices increases in U.S., consumers purchase more goods from another country which decreases amount purchased in the U.S.

2) Real Balance Effect: as price increases, the purchasing power of cash/deposits held by consumers decreases causing them to purchase fewer

3) Interest Rate Effect: higher prices cause consumers to hold more money
- Which reduces the amount held in banks
- Which decreases amount of amount of loanable funds
- Which increases interest rates
- Which decreases the quantity of AD (buyers)

Answer 5

3 Reasons for (AD) Downward slope

Question 6

Any changes in the mindset of consumers will produce an entirely new curve

(5) In order to increase AD (shift ->)…
- Increase in real income/wealth
- Increase in consumer confidence
- Decrease in interest rates
- Increase expected rate of inflation
- Decrease in expected rate value of a dollar (How many units of another countries currency you can get for $1)
- Reversed answers = decrease in AD (shift <-)

Shift in Quantity AD - change in price levels only

Answer 6

Shift in AD

Question 7

Amount of final g/s producers are willing to sell at certain price levels immediately after a change in prices
- The shape tells that producers will sell more at these increase prices because the producer costs will not change in the short run

Answer 7

Short Run Aggregate Supply (SRAS)

Question 8

Change in the mindset of producers will produce an entirely new curve
- Temporary causes SRAS

(3) In order to increase AS (shift ->)…
- Decrease in resource costs
- Decrease in expected rate of inflation
- Positive (favorable) supply shots

Reversed answers = decrease in AS (shift <-)

Answer 8

Shift in SRAS

Question 9

Amount of final g/s producers want to sell at certain price levels after they have enough time to adjust to change in prices
- Vertical line: producers might not want to sell more as price increases b/c producer costs will be increasing in the long run

Answer 9

Long Run Aggregate Supply (LRAS)

Question 10

LRAS moves = SRAS moves

(4) In order to increase LRAS/SRAS (shift ->)…
- Increase in amount of resources
- Increase in productivity of resources
- Decrease in corporate taxes (gov factor)
- Decrease in environmental regulations (gov factor)

• Permanent causes LRAS to move

Reversed answers = decrease in LR/SR (shift <-)

Answer 10

Shift in LRAS

Question 11

• Stable situation
• Trend line on business cycle
• Economy NOT too fast or not too slow

Answer 11

Long Run Equilibrium

Question 12

• Unstable situation
• Peak on business cycle
• Economy IS too fast or too slow

Answer 12

Short Run Equilibrium

Question 13

Assumes that resource prices are flexible
- No gov involvement (Laissez Faire)
- Say’s Law: supply inevitably creates its own demand
- Cost of living increases

Answer 13

Classical Economists

Question 14

Assumes that prices are not flexible and it is a downward direction in resource price
- “Sticky wages”
- “Animal spirits” so gov involvement is needed

Answer 14

Keynesianism Economists

Question 15

Too many $$ - consumers
- Inflation

Answer 15

Demand Pull Inflation

Question 16

Too few goods - producers
- Inflation
- Stagflation: slow growth, high unemployment, and rising prices

Answer 16

Cost Push Inflation