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Macro Econ > CH8 - AD and AS > Flashcards

CH8 - AD and AS Flashcards

1
Q

A change in the price level shifts the AE curve because the price level change affects desired what

A

Consumption expenditures and desired net exports.

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2
Q

What is the price level

A

The average price of all goods and services in the economy

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3
Q

What is the private sector of the economy?

A

The part of a country’s economic system that is run by individuals and companies, rather than a government entity

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4
Q

What is the effect of a rise of domestic prices on net exports?
And on the AE curve

A

it decreases net exports

It shifts the AE downward

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5
Q

What does a rise in the price level cause for the AE curve?
And for the AD curve

A

A downward shift for the AE curve
A movement upward along the AD curve

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6
Q

What happens to private sector’s wealth if the price level rises

A

It decreases

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7
Q

What does the AS curve relate the price level to?

A

The quantity of output that firms would like to produce and sell

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8
Q

What are the 2 assumptions for which the AS curve is drawn?

A

Factor prices and technology remain constant

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9
Q

Why is the AS curve upward sloping?

A

Because firms will produce more output only if prices
increase to offset higher unit costs.

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10
Q

Why is the AS curve relatively flat when GDP is low?

A

When firms have excess capacity
and
are able to expand production with little or no increase in unit costs (demand determined)

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11
Q

The aggregate supply curve shifts in response to changes in what?

A

the price of inputs and changes in technology

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12
Q

What is an aggregate supply shock?

A

Any shift in the AS curve caused by an exogenous force

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13
Q

What does an exogenous increase in the price level cause for AE?

A

A shift downward, thus a fall in real GDP

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14
Q

How are price level and real GDP related to each other?

A

Negatively
If one increases, the other decreases

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15
Q

What is the AD curve?

A

The curve showing the combinations of real GDP (x axis) and Price level (y axis) for which
Desired AE = Actual National Income

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16
Q

Why is the AD curve negatively sloped (2)

A
  1. Fall in the price level = rise in private-sector wealth –> increases desired consumption –> increase in equilibrium GDP
  2. Fall in the price level = rise in net exports and thus leads to an increase in equilibrium GDP
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17
Q

What is an aggregate demand shock?

A

Any event causing a shift in the AD curve

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18
Q

What does the simple multiplier measures for the AD curve

A

It measures the horizontal shift in response to changes in the autonomous desired expenditure

19
Q

A decrease in factor prices leads to what for the AS curve?

A

Shifts the curve downward to the right

(real GDP will increase for the same price level)

20
Q

What is a deterioration in technology?

A

change in production methods that RAISES unit costs for any given level of output

21
Q

What is an improvement in technology?

A

change in production that REDUCES unit costs for any given level of output

22
Q

What happens to the AS curve when there is an improvement of technology?

A

The curve shifts downward to the right

(increase in AS, real GDP increases for the same price level)

23
Q

What happens to the AS curve if there is an increase in Canadian exports?

A

Movement upward to the right along the AS curve

24
Q

What are the 3 things explaining the positive slope of the AS curve?

A
  1. The law of diminishing marginal returns
  2. The behaviour of profit-seeking firms
  3. The rising unit costs associated with rising output levels
25
Q

What is the law of diminishing returns

A

Unit costs tend to rise as output rises

As investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase.

26
Q

What happens to the AS curve when wages rise faster than the increase in labor productivity?

A

AS curve shifts upward

27
Q

What does macroeconomic equilibrium determines?

A

Equilibrium levels of price and GDP

28
Q

Macroeconomic equilibrium occurs at the intersection of what?

A

The AS and AD curves

29
Q

What are the 2 conditions for a macroeconomic equilibrium?

A
  1. At the prevailing price level, desired AE must be equal to actual GDP –> this condition holds along the AD curve
  2. At the prevailing price level, firms must want to produce the prevailing level of GDP, no more, no less –> this condition holds along the AS curve
30
Q

What will a positive shock cause to the AD curve, the GDP, and the Price level

A

A shift the the right
Price level increase
Real GDP increase

Price level and GDP in same direction
Events sifting the AE up will shift the AD to the right

31
Q

What will a positive shock cause to the AS curve, the GDP, and the Price level

A

A shift to the right
Price level decrease
Real GDP increase

Price level and GDP in opposite directions

32
Q

The multiplier when the price level varies is smaller or bigger than the simple multiplier?

A

Smaller

33
Q

Why is the multiplier smaller when the price level varies?

A

Because an increase in autonomous expenditure cause the AE to shift up
but
the increase in price level causes it to shift down a little

34
Q

The steeper the AE curve, the _______ the price effect and the _______ the GDP effect

A

greater
smaller

35
Q

When does a recessionary gap occur?

A

When actual level of output is less than the potential one

36
Q

When the AS curve is flat, the multiplier is ______ than when it’s not flat

A

Larger

37
Q

What is stagflation

A

The particular​ case where both inflation and unemployment​ rise

38
Q

A variable price level … the value of the multiplier

A

reduces

39
Q

Aggregate supply shocks cause the price level and real GDP to change in _______ directions

A

opposite

40
Q

The aggregate demand curve shows the relationship between

A

the price level and the quantity of real GDP demanded

41
Q

The COVID-19 pandemic created what regarding AS and AD shocks

A

A combined negative AS shock and negative AD shock

42
Q

Aggregate demand shocks cause the price level and real GDP to change in _______ directions

A

same

43
Q

For a country that uses oil as an input, an unexpected change in the price of oil would be called __________ by economists (assume the country does not produce and export oil).

A

A supply shock

44
Q

For countries such as Canada that also produce and export oil, a decrease in the price of oil causes a reduction in income to domestic oil producers and is thus a _________

A

negative aggregate demand shock

Macro Econ (14 decks)

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