CH.8 Aggregate Demand & Aggregate Supply

Question 1

Define aggregate demand.

Answer 1

Aggregate demand is the quantity demanded of all goods & services (Real GDP) at different price levels, ceteris paribus.

Question 2

What is an aggregate demand curve (AD)?

Answer 2

An aggregate demand curve (AD) shows the quantity demanded of all goods & services (Real GDP) at different price levels, ceteris paribus

Question 3

What is the real balance effect?

Answer 3

The real balance effect is the change in the purchasing power of dollars-denominated assets that results from a change in the price level.

Question 4

Define monetary wealth.

Answer 4

The value of a person’s monetary wealth.

Question 5

Define purchasing power.

Answer 5

Purchasing power is the quantity of goods & services that can be purchased with a unity of money.

Question 6

How is purchasing power related to price?

Answer 6

Purchasing power and price level are inversely related – as the price level goes up (down), purchasing power goes down (up).

Question 7

How does monetary wealth differ from wealth?

Answer 7

Wealth refers to the value of all assets owned, both monetary and nonmonetary. (i.e. a person’s wealth equals his or her monetary wealth).

Question 8

What is the interest rate effect?

Answer 8

The interest rate effect is the changes in household and business buying as the interest changes (in turn, a reflection of a change in the demand for or supply of credit brough on by price level changes).

Question 9

What is the international trade effect?

Answer 9

The international trade effect is the change in the foreign sector spending as the price level changes.

Question 10

Define wealth.

Answer 10

Wealth is the value of all assets owned, both monetary and nonmonetary.

Question 11

What is the exchange rate?

Answer 11

The exchange rate is the price of one currency in terms of another currency.

Question 12

Define appreciated (currency).

Answer 12

An increase in the value of one currency relative to the other is considered to have appreciated.

Question 13

Define depreciated (currency).

Answer 13

A decrease in the value of one currency relative to the other is considered to have depreciated.

Question 14

Define velocity.

Answer 14

Velocity is the average number of times a dollar is spent to buy final goods & services in a year.

Question 15

Define aggregate supply.

Answer 15

Aggregate supply is the quantity supplied of all goods & services (Real GDP) at different price levels, ceteris paribus.

Question 16

What is a short-run aggregate supply (SRAS) curve?

Answer 16

A short-run aggregate supply (SRAS) curve shows the quantity supplied of all goods & services (Real GDP) at different price levels, ceteris paribus.

Question 17

Define short-run equilibrium.

Answer 17

Short-run equilibrium is the condition in the economy when the quantity demanded and Real GDP equals the (short-run) quantity supplied of Real GDP.

Short-run equilibrium is met where the aggregate demand curve intersects the short-run aggregate supply curve.

Question 18

What is Natural Real GDP?

Answer 18

Natural Real GDP is the Real GDP that’s produced at the natural unemployment rate and when the economy is in long-run equilibrium.

Question 19

What is a long-run aggregate supply (LRAS) curve?

Answer 19

A long-run aggregate supply (LRAS) curve represents the output the economy produces when wages and prices have adjusted to their final equilibrium levels and when workers don’t have any relevant misperceptions.

The LRAS line is a vertical line at the level of the Natural Real GDP.

Question 20

Define long-run equilibrium.

Answer 20

Long-run equilibrium is the condition that exists in the economy when wages and prices have adjusted to their (final) equilibrium levels and when workers don’t have any relevant misperceptions.

On a graph, the long-run equilibrium occurs at the intersection of the AD and LRAS curves.