Chapter 10; Economic Fluctuations Flashcards
Aggregate demand
relationship between prices and total expenditures of an economy
Describe the wealth effect
When the price level rises, the value of assets decreases, prompting people to spend less and vice versa
Describe the foreign trade effect
Higher prices in Canada mean fewer will buy exports from Canada, leading to fewer Net exports
What causes changes to aggregate demand?
Consumption, Investment, Government spending, Net exports
What factors effect consumer spending
Change in Disposable Income, wealth(stocks bonds), Consumer expectations, interest rates(more interest less spending/borrowing)
When do people invest?
When the real rate of return is positive, (more profit than the initial cost of investment)
How will a rise in interest rate effect aggregate demand?
more interest means less investments and less consumer spending meaning less aggregate demand
Aggregate supply
Relationship between prices and total real output produced in a economy
What factors effect net exports
An increase in the value of a dollar decreases exports, Increased foreign incomes means more net exports
Factors that effect long term aggregate supply
Resources(Capital, land, labour), Technology, government policies
Difference between short and long term aggregate supply change
Long term accounts for change in potential output
What happens when the real output is greater than the potential output
Caused by things like overtime and rented machinery, The price to further expand production is greater per unit of additional output, production capacity is under utilized
Factors that effect short term aggregate supply
Input prices(wages, raw material prices)
positive unplanned investment
unintended Surplus of inventory
negative unplanned inestment
unintended shortage of inventory
What make up withdraws
Savings(S) Taxes(T) and Imports(M)
What make up Injections
Investment (I), Government spending (G) and Exports (X)
What are injections and withdrawals in equilibrium
Injections make up things that circulate are income spending in the economy, withdrawals take income money out of the economy
What happens at equilibrium
Total injections = Total withdraws, Real expenditure = Real output
What happens in a recessionary gap
The equilibrium output is less than the potential output, unemployment exceeds natural unemployment
What happens in a inflationary gap
The equilibrium output is more than the potential output, unemployment is less than natural unemployment
what is the rule of 72?
The number of years it takes for a variable to double is estimated by dividing 72 by the variable’s annual percentage growth rate
What is expansion and contraction
The change in real output of an economy
In a business cycle when does contraction and expansion occur
Contraction occurs between the peak and trough as the business cycle is declining, and expansion occurs from trough to the peak as B.C is rising
