Chap. 7 - Aggregate Demand & Supply Flashcards
What does the Aggregate Demand Curve represent?
Aggregate output, because it shows the various amounts of goods and services which domestic consumers (C), businesses (I), the government (G), and foreign buyers (NX) collectively will desire at each possible price level.
When prices fall what happens to the Consumption Function?
When prices fall the Consumption Function rises along the Aggregate Expenditure Axis
When the Consumption Function rises along the Aggregate Expenditure Curve how does that affect GDP?
The equilibrium level of GDP goes up. GDP shifts outward along the Real GDP axis
Why does it make sense for the AD curve to slope downward and to the right?
The real balances effect, the interest rate effect, and the foreign purchases effect
What is Real Balances?
This refers to the purchase power of a given amount of money in circulation. We make the assumption that at any given point in time, there is a fixed amount of money in circulation. At higher price levels, the money in circulation can purchase fewer items.
What is Real Balances Effect?
The relationship between prices and the amount of goods and services that can be purchased with a given money supply
What does the Interest Rate Effect explain?
The impact that the price level has on interest rates, and thus on certain components of AD. When the price level goes up, people need more money to transact their daily purchases. Therefore, higher prices lead to an increase in the demand for money.
If you were a banker and the demand for money increased how would you encourage deposits and discourage lending?
Increase the interest rates. As interest rates go up, investment demand and certain interest-rate sensitive consumption purchases will fall. Thus, increases in the price lead to increases the interest rate, which reduces the demand for both Consumption and Investment, and thus real output.
Explain the Foreign Purchases Effect?
When US prices rise relative to world prices, foreigners buy fewer US goods and Americans buy more foreign goods, so NX fall. Since NX are part of AD, this contributes to an inverse relationship between the price level and the demand for our real domestic output.
Real Balances Effect, Interest Rate Effect, and Foreign Purchases Effect cause a _______ _______ the AD curve.
movement along
What is an aggregate demand shifter?
Anything that will influence the levels of Consumption (Income, Tax, Expectations), Investment (Interest Rates, Taxes Technology, Expectations), Government Spending, or Net Exports (Income Abroad, Exchange Rates) OTHER THAN changes in the price level.
What is Aggregate Supply? What are the three distinct ranges called?
The level of real domestic output available at each possible price level. The graph looks like a backwards L, price lvl is the y axis and real GDP is the x axis.
Keynesian Range, the Intermediate Range, and the Classical Range. The various ranges depict three different states in which the economy may find itself.
Describe the Keyensian Range of AS.
Outputs are substantially bellow full employment (Qf), and it is the flat part of the backward L. Keynesian AS illustrates the idea of the economy being able to increase real output with no increase in the price level during periods of high unemployment. This range of the AS curve is also sometimes referred to as the Short Run AS curve.
Describe the Classical Range of AS.
At or very near full employment. It is the vertical part of the backwards L. The Classical AS curve is sometimes called the Long Run AS curve. The overall output in the economy stays the same at Qf.
Describe the Intermediate Range of AS.
We are at output levels that are below full employment, but not so far below as to constitute a deep recession or depression. In this range, increasing output is possible, but only at the expense of rising prices. This is the area where we usually find ourselves in the economy.
