Aggregate Supply And Demand

Question 1

Aggregate demand AD

Answer 1

The output of goods and services (real GDP) de,added at different price lvl. Measures the sum. Sloped downward, showing how output increase as prices fall and vice versa. Shows the relationship between real GDP and price lvl

Question 2

Why is AD downward sloping?

Answer 2

Wealth effect (increased prices -> power of savings fall), export price lvl (increased prices -> domestic products are expensive -> less purchases by foreigners), interest rate effect (increased prices -> more money to carry transactions)

Question 3

Why is product demand curve is downward sloping?

Answer 3

Income, substitution effect, effect of price lvl on financial wealth, exports and interest rates

Question 4

Wealth effect

Answer 4

Household usually hold some of their wealth in financial assets such as saving assets, bonds and cash and rising aggregate price lvl means that the purchasing power of this monetary wealth declines, reducing output demanded.

Question 5

Determinants of AD

Answer 5

Consumer spendings, investment spending, gov expenditures, net exports, effect of prices on the demand for money. Change in one of this will shift the curve

Question 6

Aggregate supply

Answer 6

The real GDP that firms will produce at varying price lvl. Is positively sloped in short run but vertical in the long run

Question 7

What happens in the short run?

Answer 7

AS increases as prices increase and vice versa. Upward sloping curve

Question 8

What happens in the long run?

Answer 8

Measures the economy at its potential output with full employment. Vertical curve

Question 9

LRAS

Answer 9

vertical at full employment because the economy has reached its capacity. Incorporates assumptions of classical economic analysis (all variables are adjusted in the long run, where product prices, wages, and interest rates are flexible). Output is not affected by the price lvl.

Question 10

Determinants of LRAS

Answer 10

Amount of resources, the quality of labor or tech

Question 11

To what does the full employment referred?

Answer 11

Natural rate of output or the natural rate of unemployment

Question 12

SRAS

Answer 12

Positive relationship between the aggregate price lvl and aggregate output. Positive because many input costs are slow to change (sticky) In the short run. Increases output when prices rise. Input prices will take time to react and increase in some prices will temporarily increase business profits and stimulate production growth in the short run. Curve is flatter at lower price lvl of output and steeper higher lvl of output to reflect the reduced stickiness of input prices as aggregate output rices

Question 13

Determinants of SRAS

Answer 13

Input prices, productivity, taxes, regulations, the market power of firms and inflationary expectations

Question 14

A short run macroeconomic equilibrium

Answer 14

Occurs at the intersection of the short run AS and demand curves. At this output lvl, there re no net pressures for the economy to expand or contract

Question 15

A long run equilibrium

Answer 15

All markets are at the equilibrium, all prices and quantities have fully adjusted and are in equilibrium

Question 16

Spending multiplier

Answer 16

Spending changes alter equilibrium income by the spending change time the multiplier. Operates in both directions (someone’s spendings are someone’s income) 1/1-mpc=1/mps. Exists because new spendings generate new round by round (based on the mpc and save) that creates additional income

Question 17

Demand pull inflation

Answer 17

Results when AD expands so much that equilibrium output exceeds full employment output and the price lvl increase

Question 18

Cost push inflation

Answer 18

Occurs when a supply shock causes short run AS to decrease, causing the price lvl to increase along with rising unemployment. Aggregate output increases when aggregate price lvl increases in the short run

Question 19

What will cause a movement along the AD curve?

Answer 19

A decrease in exports brought about a higher price lvl

Question 20

Interest rate effect

Answer 20

Change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price lvl

Question 21

Net effect

Answer 21

Value of a product or service increase when the number of people who purchase it increase

Question 22

What affects AD

Answer 22

A decrease in gov spending, increase in tax rates, recession occurred abroad, consumer confidence, wealth

Question 23

International effect

Answer 23

Phenomenon which explain that changes in the domestic price lvl, Ceteris paribus, have on the quantity of exports demanded by foreign households