AD and AS, Monetary Policy, Fiscal Policy, Applications

Question 1

This determines the equilibrium price and quantity of EVERYTHING (loosely speaking), i.e., the price level (cost of living) and real GDP (national income).

Answer 1

The model of aggregate demand and aggregate supply

Question 2

An increase in the price
level P reduces the
quantity of goods and
services demanded
because of the:

Answer 2

1. wealth effect (C falls)
2. interest rate effect (I falls)
3. exchange-rate effect (NX falls)

Question 3

This shows the total quantity of goods and services firms produce and sell at any given price level; upward sloping in the short run, vertical in the long run

Answer 3

the aggregate supply (AS) curve

Question 4

the amount of output the economy produces when unemployment is at its
natural rate

Answer 4

the natural rate of output

Question 5

The level of real GDP, in
the long run, is also
called ___.

Answer 5

potential output or full-employment output

Question 6

3 Theories on Why short-run aggregate supply is upward-sloping

Answer 6

1. Sticky-wage theory
2. Sticky-price theory
3. Misperceptions theory

Question 7

When the economy
reaches this, the
expected price level will
have adjusted to the
actual price level.

Answer 7

The long-run macroeconomic equilibrium

Question 8

This is setting the level of government spending and taxation by government policymakers.

Answer 8

Fiscal policy

Question 9

2 types of fiscal policy

Answer 9

expansionary and contractionary

Question 10

the two effects fiscal policy has on aggregate demand

Answer 10

multiplier effect and crowding-out effect