Aggregate Demand Test Flashcards
What is the classical economics theory?
Self correcting, downward flexible wages and prices, and laissez-faire
What is the theory after the Great Depression?
Keynesian theory
What is the Keynesian theory?
Not self correcting, inflexible wages/prices, government involvement
What are 4 assumptions of the aggregate expenditure model?
Closed economy
Private economy
All savings are personal saving
GDP=NI=PI=DI
What does it mean that there is a closed economy?
No net exports
What does it mean that there is a private economy?
No government interference
What are your two options with your money?
Spend or save
APC=
Consumption/ income
APS=
Saving/ income
MPC=
Change in consumption/change in income
MPS=
Change in saving/change in income
What is the multiplier?
1/MPS
Moving along the consumption of savings schedule is caused by what?
Income changes
What does an increase in wealth do to the consumption/ saving schedule?
C increases
S decreases
What does change in price do to consumption and saving schedules?
If price goes down c increases and savings goes down and vice versa
If there are expectations of inflation what happens?
There is an increase in consumption
What does lowered debt do to consumption and saving schedule?
Consumption. Goes up and savings goes down
Lowered taxes does what to the consumption and savings schedules?
Both go up
What is the rule for investment demand curve?
A business will invest up to the point at which profit will equal interest rate
Does changing interest rate affect the investment demand curve?
It doesn’t cause a shift
What makes the aggregate demand curve downward sloping?
The interest rate effect, wealth effect, net export effect
What is the interest rate effect?
Price increases so will interest rates
What is the wealth effect?
The higher the price the less you can buy with your money
What is the net export effect?
American buyers can buy more for less
Changes in prices don’t caused shifts in
The aggregate demand and aggregate supply
What factors can cause the aggregate demand to shift?
Consumer spending, investment spending, government spending
What are the 3 phases of aggregate supply?
Recession, intermediate, and inflation
What factors shift the aggregate supply curve?
Changed in resource prices, changes in labor or technology, taxes, and government regulations
How do you calculate the multiplier from a graph?
Change in consumption/ change is disposable income
What book did John Keyes write?
General Theory of Employment, interest, and Money
What is the ratchet effect?
Prices tend to be sticky or inflexible downward; price levels don’t operate downward
What are cussed of downward inflexible prices?
Wage contracts, morale, effort, and productivity, training investment, minimum wage, menu costs, and fear of price wars
What is the economic theory before the Great Depression?
Classical economics theory
