Aggregate Supply and demand Flashcards
The payments for factors of production is equivalent to?
Income received by households
What is aggregate supply?
The relationship between quantity of real GDP supplied and the price level.
How is aggregate supply affected by price level changes in the short run?
As price level increases, real GDP increases as it is assumed costs for factors of production are held constant.
Simply put, you produce more at the new marginal revenue (you can potentially make more money if you assume you get the costs repaid via more expensive products) and so GDP increases.
How is aggregate supply affected in the long run?
As price level increases, real GDP tends to remain constant. This is because marginal costs rise with the price level by relatively the same amount I.e. It adjusts to changes in price level.
It is relatively the same amount as workers will demand a higher wage to account for their higher costs of living. So they want to be compensated to get purchasing power assumed to be optimal for the costs of living.
What happens to the use of factors of production in the short run for aggregate supply? Does this change with the long run?
In the short run for aggregate supply, the firm goes from full employment to above full employment.
It will eventually try to reach full employment levels again as workers demand higher wages.
What is the quantity of real GDP demanded?
The quantity of real GDP demanded is the market value of all final goods and services that households are willing to buy.
What is aggregate demand?
Aggregate demand gives the relationship between quantity of real GDP demanded and price level.
What happens to real GDP as price level increases?
Quantity of real GDP demanded decreases as price level increases.
What is the wealth effect?
The wealth effect is one explanation for why Aggregate Demand is downward sloping. It is when higher prices consequently results in lower household wealth and thus reduced consumption (reduced willingness to buy).
What is the Inter-temporal Substitution Effect?
A factor for why AD is downward sloping. Higher costs of living leads to reduced household savings, leading to less money in the bank to loan out, leading to higher interest rates, leading to less investments.
What is the international substitution effect?
A factor for why aggregate demand is downward sloping. It is when domestic goods or services are more expensive than imports thus there is more demand for imports and less aggregate demand for domestic goods.
What is the significance of a point where Aggregate supply and demand intersect at a point?
That is the potential GDP.
What is the real quantity of GDP supplied?
The market value of all final goods and services that a firm plans to produce.
What are the effects on equilibrium GDP and price level when aggregate demand shifts to the right?
There is an inflationary gap followed by demand-pull inflation. Overall effects is that the price level has increased, and equilibrium GDP is eventually reached again.
What is an inflationary gap?
It is the difference between real GDP and potential GDP when firms produce above full employment I.e. Real GDP is above potential GDP.
