Aggregate Supply and Aggregate Demand Flashcards
aggregate supply
total production of supply for all goods and services
Y= af(K,L,H,N)
aggregated demand
total purchases of the whole economy
Y= C+I+G+Nx
aggregated supply curve slopes upwards
Sticky price sticky wage theory
-price goes up; purchasing power of one dollar goes down; (w/P) will go down; real wage goes down; “sticky wage”→ you’re being paid less; so owner gets extra money; Y goes up
sticky price sticky wage
“sticky price sticky wage theory” (a way for economy not to get to equilibrium) : A sticky wage is when employee wages do not rise at the same rate as the rest of the economy
three reasons why aggregated demand decreases
wealth effect
interest rate effect
exchange rate effect
wealth effect
prices goes down; purchasing power of one dollar goes up; quantity of money demand will fall (now you have extra money); consumption goes up; so (Y) GDP rises
interest rate effect
-price goes down; purchasing power of one dollar goes up; quantity of money demand will fall (now you have extra money); savings rises (interest rates fall); people borrow more money; investment goes up (investment = savings); Y goes up
exchange rate effect
price goes down; purchasing power of one dollar goes up; quantity of money demand will fall; savings rises; interest rates goes down; move money to a country with higher interest rate; country converts money into their currency; the dollar depreciates which means it becomes weaker; exports rise; Nx rises; GDP rises
fiscal policy
-Lower taxes -> C goes up, Y goes up
-Increase government spending -> Y goes up
monetary policy
wants to push up investments (borrowing)
-lower interest rates
-lower reserve ratio
-buy bonds
all of them push up the multiplier -> push up loans -> push up money supply -> push up investment -> push up Y
recession
when GDP goes down
inflation
when price goes up
stagflation
when GDP goes down and prices goes up
how do you fix when short run aggregated supply shifts to the left?
you fix it buy shifting aggregated demand to the right through fiscal or monetary policy
which ones worst aggregated supply shift or aggregated demand shift
aggregated supply shift because you can’t get rid of inflation
money neutrality
nominal variable price cannot change real variable rGDP (Y) in the long run
why doesn’t long run aggregate supply move?
money neutrality
equation of exchange
Ms x V = P x Y
Ms x V = (nGDP/rGDP) x rGDP
real GDP cancels out making the equation
Ms x V = nGDP
does increasing money supply increase real GDP according to the equation of exchange?
increasing money supply does not increase rGDP; it will only increase prices which causes inflation to increase
Ms x V = P x Y
when Ms increases P increases, which makes it seem like rGDP increased
what do the variables in “Ms x V = P x Y” mean?
Ms = money supply; nominal
V = velocity of money; nominal
P = price -> (nGDP/rGDP); nominal
Y = rGDP; real
