CH8 - AD and AS Flashcards
A change in the price level shifts the AE curve because the price level change affects desired what
Consumption expenditures and desired net exports.
What is the price level
The average price of all goods and services in the economy
What is the private sector of the economy?
The part of a country’s economic system that is run by individuals and companies, rather than a government entity
What is the effect of a rise of domestic prices on net exports?
And on the AE curve
it decreases net exports
It shifts the AE downward
What does a rise in the price level cause for the AE curve?
And for the AD curve
A downward shift for the AE curve
A movement upward along the AD curve
What happens to private sector’s wealth if the price level rises
It decreases
What does the AS curve relate the price level to?
The quantity of output that firms would like to produce and sell
What are the 2 assumptions for which the AS curve is drawn?
Factor prices and technology remain constant
Why is the AS curve upward sloping?
Because firms will produce more output only if prices
increase to offset higher unit costs.
Why is the AS curve relatively flat when GDP is low?
When firms have excess capacity
and
are able to expand production with little or no increase in unit costs (demand determined)
The aggregate supply curve shifts in response to changes in what?
the price of inputs and changes in technology
What is an aggregate supply shock?
Any shift in the AS curve caused by an exogenous force
What does an exogenous increase in the price level cause for AE?
A shift downward, thus a fall in real GDP
How are price level and real GDP related to each other?
Negatively
If one increases, the other decreases
What is the AD curve?
The curve showing the combinations of real GDP (x axis) and Price level (y axis) for which
Desired AE = Actual National Income
Why is the AD curve negatively sloped (2)
- Fall in the price level = rise in private-sector wealth –> increases desired consumption –> increase in equilibrium GDP
- Fall in the price level = rise in net exports and thus leads to an increase in equilibrium GDP
What is an aggregate demand shock?
Any event causing a shift in the AD curve
What does the simple multiplier measures for the AD curve
It measures the horizontal shift in response to changes in the autonomous desired expenditure
A decrease in factor prices leads to what for the AS curve?
Shifts the curve downward to the right
(real GDP will increase for the same price level)
What is a deterioration in technology?
change in production methods that RAISES unit costs for any given level of output
What is an improvement in technology?
change in production that REDUCES unit costs for any given level of output
What happens to the AS curve when there is an improvement of technology?
The curve shifts downward to the right
(increase in AS, real GDP increases for the same price level)
What happens to the AS curve if there is an increase in Canadian exports?
Movement upward to the right along the AS curve
What are the 3 things explaining the positive slope of the AS curve?
- The law of diminishing marginal returns
- The behaviour of profit-seeking firms
- The rising unit costs associated with rising output levels
What is the law of diminishing returns
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.
What happens to the AS curve when wages rise faster than the increase in labor productivity?
AS curve shifts upward
What does macroeconomic equilibrium determines?
Equilibrium levels of price and GDP
Macroeconomic equilibrium occurs at the intersection of what?
The AS and AD curves
What are the 2 conditions for a macroeconomic equilibrium?
- At the prevailing price level, desired AE must be equal to actual GDP –> this condition holds along the AD curve
- 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
What will a positive shock cause to the AD curve, the GDP, and the Price level
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
What will a positive shock cause to the AS curve, the GDP, and the Price level
A shift to the right
Price level decrease
Real GDP increase
Price level and GDP in opposite directions
The multiplier when the price level varies is smaller or bigger than the simple multiplier?
Smaller
Why is the multiplier smaller when the price level varies?
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
The steeper the AE curve, the _______ the price effect and the _______ the GDP effect
greater
smaller
When does a recessionary gap occur?
When actual level of output is less than the potential one
When the AS curve is flat, the multiplier is ______ than when it’s not flat
Larger
What is stagflation
The particular case where both inflation and unemployment rise
A variable price level … the value of the multiplier
reduces
Aggregate supply shocks cause the price level and real GDP to change in _______ directions
opposite
The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded
The COVID-19 pandemic created what regarding AS and AD shocks
A combined negative AS shock and negative AD shock
Aggregate demand shocks cause the price level and real GDP to change in _______ directions
same
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 supply shock
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 _________
negative aggregate demand shock
