chapter 10 - AS & AD Flashcards
aggregate supply
the relationship between the quantity of real GDP supplied and the price level
long-run aggregate supply
relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP
long-run aggregate supply curve shape/location
vertical at potential GDP
short-run aggregate supply
relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other
resources, and potential GDP remain constant
when does aggregate supply change?
when something other than the price level changes, including:
- changes in potential GDP
- changes in money wage rate
what happens to LAS and SAS when potential GDP increases?
both curves shift rightward
aggregate demand
relationship between the quantity of real GDP demanded and the price level
AD curve slopes downward for what two reasons?
- wealth effect
- substitution effects
wealth effect
A rise in the price level decreases the quantity of real wealth (money, stocks, etc)
To restore their real wealth, people increase savings & decrease spending, so q of real GDP demanded decreases
intertemporal substitution effect
A rise in the price level decreases the real value of money and raises the interest rate.
when the interest rate rises, people borrow and spend less, so the quantity of real GDP demanded decreases.
international substitution effect
a rise in the price level increases the price of domestic goods relative to foreign goods.
so, imports increase and exports decrease, which decreases the quantity of real GDP demanded.
main influences on aggregate demand
- expectations
- fiscal policy
- monetary policy
- the world economy
expectations
increases in expected future income increase people’s
consumption today and increase aggregate demand.
a rise in the expected inflation rate makes buying goods
cheaper today and increases aggregate demand
an increase in expected future profits boosts firms’
investment, which increases aggregate demand
fiscal policy
government’s attempt to influence the
economy by setting and changing taxes, making transfer payments,
and purchasing goods and services
a tax cut or an increase in transfer payments increases
households’ disposable income—aggregate income minus taxes
plus transfer payments
monetary policy
changes in interest rates and the quantity of money in the economy.
an increase in the quantity of money increases buying
power and increases aggregate demand.
the world economy
influences AD in 2 ways:
a fall in the foreign exchange rate lowers the price of
domestic goods and services relative to foreign goods
and services, which increases exports, decreases
imports, and increases aggregate demand.
an increase in foreign income increases the demand for
Canadian exports and increases aggregate demand.
short-run macroeconomic equilibrium
occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the SAS curve
long-run macroeconomic equilibrium
occurs when real GDP equals potential GDP—when the economy is on its
LAS curve. (intersection of AD and LAS curves)
below full-employment equilibrium
equilibrium in which potential GDP exceeds real GDP
full-employment equilibrium
equilibrium in which
real GDP equals potential GDP
above full-employment equilibrium
equilibrium
in which real GDP exceeds potential GDP
an increase in the expected inflation rate does what to the graph?
shifts the AD curve right - people anticipate higher prices later so they spend more now
