Business Fluctuations: Aggregate Demand and Supply

Question 1

Define the solow growth rate

Answer 1

The solow growth rate is an economy’s potential growth rate, the rate of economic growth that would occur given flexible prices and the existing real factors of production.

Question 2

What’s the aggregate demand curve?

Answer 2

The aggregate demand curve shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

Question 3

What are real shocks?

Answer 3

Real shocks are rapid changes in economic conditions that increase or diminish the productivity of capital and labour, which in turn influences GDP and employment.

Question 4

What’s an aggregate demand shock?

Answer 4

An aggregate demand shock is a rapid and unexpected shift in the aggregate demand curve.

Question 5

Explain the short-run aggregate supply curve (SRAS)

Answer 5

The SRAS curve is upward-sloping. An upward-sloping SRAS means that in the short run an increase in aggregate demand will increase both the inflation rate and the growth rate.

Question 6

What’s nominal wage confusion?

Answer 6

Nominal wage confusion occurs when workers respond to their nominal wage instead of their real wage.

(When workers respond to the wage number on their pay-checks rather than to what their wage can buy in goods and services)

Question 7

What are menu costs?

Answer 7

Menu costs are the costs of changing prices.

Question 8

Why do changes in v (velocity of money) tend to be temporary?

Answer 8

Example: When consumers are pessimistic and consumption decreases, they save. When they have saved enough they become confident again, and so consumer spending will get back to normal.

Question 9

Name 5 positive shocks that increase Aggregate demand:

Answer 9

• A faster money growth rate
• Confidence
• Increased wealth
• Lower taxes
• Greater growth of government spending

Question 10

Name 5 negative shocks that decrease aggregate demand

Answer 10

• A slower money growth rate
• Fear
• Reduced wealth
• Higher taxes
• Lower growth of government spending

Question 11

Name the 5 mistakes the Fed made that caused the great depression

Answer 11

1. Fed began raising the fed funds rate.
2. When the stock market crashed, investors turned to the currency markets. Speculators began trading in their dollars for gold, which caused a run on the dollar.
3. The fed raised interest rates to preserve the dollar’s value.
4. The fed didn’t increase the supply of money to combat the deflation
5. Investors withdrew all their deposits from the banks.

Question 12

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