Aggregate Demand

Question 1

Aggregate Demand (AD)

Answer 1

The total demand for goods and services in the economy

Question 2

Real Wealth/Real Balance Effect

Answer 2

When the price level increases, the value of assets such as cash and checking account balances falls

Question 3

Foreign Trade Effect

Answer 3

When the price level in one country increases, the prices of imports from other countries become relatively less expensive

Question 4

Interest Rate Effect

Answer 4

When the price level increases, the real quantity of money (purchasing power) decreases

Question 5

Consumption

Answer 5

Affected by:
Expectations
Income
Wealth
Optimism About Jobs and Income

Question 6

Investment

Answer 6

Affected By:
Interest Rates
Investor Optimism

Question 7

Government Spending

Answer 7

Affected By:
Spending
Money Supply
Taxes

Question 8

Net Exports

Answer 8

Affected By:
Exchange Rate
Foreign Income

Question 9

Cost-Push/Supply-Side Inflation

Answer 9

When inflation results from an increase in the resource costs that shifts the AS curve to the left

Question 10

Stagflation

Answer 10

Combination of rising prices and falling output

Question 11

Demand Pull Inflation

Answer 11

The result of the AD curve shifting out to the right relative to the AS curve for any reason that could increase AD

Question 12

Creeping Inflation

Answer 12

Inflation that remains steady for a long period at a low rate

Question 13

Galloping Inflation

Answer 13

Unsteady inflation that exceeds 10% per year and grows month after month

Question 14

Hyperinflation

Answer 14

Very rapid price increases in excess of 50% per year

Question 15

Recessionary Gap

Answer 15

Exists as the amount by which equilibrium real GDP would have to increase to reach the long-run

Question 16

Inflationary Gap

Answer 16

Exists as the amount by which equilibrium real GDP would have to decrease to reach the long-run

Question 17

Spending/Expenditure Multiplier

Answer 17

The number by which the initial amount of new spending should be multiplied to find the total resulting increase in real GDP (1/MPS)

Question 18

Marginal Propensity to Consume (MPC)

Answer 18

The amount by which consumption increases for every additional dollar of real income (MPC = Change in Consumption/Change in Income)

Question 19

Marginal Propensity to Save(MPS)

Answer 19

The fraction of each additional dollar of income saved (MPS = Change in Saving/Chang in Income or 1-MPC)