Chapter 10; Economic Fluctuations

Question 1

Aggregate demand

Answer 1

relationship between prices and total expenditures of an economy

Question 2

Describe the wealth effect

Answer 2

When the price level rises, the value of assets decreases, prompting people to spend less and vice versa

Question 3

Describe the foreign trade effect

Answer 3

Higher prices in Canada mean fewer will buy exports from Canada, leading to fewer Net exports

Question 4

What causes changes to aggregate demand?

Answer 4

Consumption, Investment, Government spending, Net exports

Question 5

What factors effect consumer spending

Answer 5

Change in Disposable Income, wealth(stocks bonds), Consumer expectations, interest rates(more interest less spending/borrowing)

Question 6

When do people invest?

Answer 6

When the real rate of return is positive, (more profit than the initial cost of investment)

Question 7

How will a rise in interest rate effect aggregate demand?

Answer 7

more interest means less investments and less consumer spending meaning less aggregate demand

Question 8

Aggregate supply

Answer 8

Relationship between prices and total real output produced in a economy

Question 8

What factors effect net exports

Answer 8

An increase in the value of a dollar decreases exports, Increased foreign incomes means more net exports

Question 8

Factors that effect long term aggregate supply

Answer 8

Resources(Capital, land, labour), Technology, government policies

Question 8

Difference between short and long term aggregate supply change

Answer 8

Long term accounts for change in potential output

Question 8

What happens when the real output is greater than the potential output

Answer 8

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

Question 9

Factors that effect short term aggregate supply

Answer 9

Input prices(wages, raw material prices)

Question 10

positive unplanned investment

Answer 10

unintended Surplus of inventory

Question 11

negative unplanned inestment

Answer 11

unintended shortage of inventory

Question 12

What make up withdraws

Answer 12

Savings(S) Taxes(T) and Imports(M)

Question 13

What make up Injections

Answer 13

Investment (I), Government spending (G) and Exports (X)

Question 14

What are injections and withdrawals in equilibrium

Answer 14

Injections make up things that circulate are income spending in the economy, withdrawals take income money out of the economy

Question 15

What happens at equilibrium

Answer 15

Total injections = Total withdraws, Real expenditure = Real output

Question 16

What happens in a recessionary gap

Answer 16

The equilibrium output is less than the potential output, unemployment exceeds natural unemployment

Question 17

What happens in a inflationary gap

Answer 17

The equilibrium output is more than the potential output, unemployment is less than natural unemployment

Question 18

what is the rule of 72?

Answer 18

The number of years it takes for a variable to double is estimated by dividing 72 by the variable’s annual percentage growth rate

Question 19

What is expansion and contraction

Answer 19

The change in real output of an economy

Question 20

In a business cycle when does contraction and expansion occur

Answer 20

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