Chapter 11 - Aggregate Supply And Demand Flashcards
What are the 3 determinants of the Macro Economy
-Internal market forces
-External shocks
-Policy levers
Describe “internal market forces”
Population growth, spending behavior, invention and innovation
Describe “external shocks”
Wars, natural disasters, terrorist attacks, trade disruptions
Describe “policy levers”
Tax policy, gov spending, changes in interest rates, credit availability, money, trade policy immigration policy, and regulation
What are the 3 outcomes of the macro economy
Output (GDP)
Jobs (unemployment rate)
Prices (inflation)
Describe “output”
The total volume of goods and services produced (real GDP)
Describe “jobs”
The levels of employment and unemployment
Describe “prices”
The average prices of goods or services
What is aggregate demand?
The TOTAL QUANTITY of output demanded at alternative price levels at a given time period
Describe the aggregate demand curve
Downwards sloping. Real output (quantity/year)on x axis and price level (average price) on y axis
The aggregate demand curve shows that lower prices encourage….
MORE SPENDING
When looking at the aggregate demand curve, when average price decreases, real output ____. What does this say about the demand for output?
Real output increases. Therefore, more output is demanded
What are the 3 reasons for the AD curve being downwards sloping?
- Real balances effect
- Foreign trade effect
- Interest-rate effect
Describe the real balances effect
As prices fall, money can purchases MORE goods and services (purchasing power increases as prices decrease). Value of money is measured by how much goods and services 1$ can buy
Describe the foreign trade effect
If domestic prices decline, consumers demand more domestic output (and fewer imports)
Also, other countries are more likely to want to buy our products
Net export =
Exports - imports
AD=
C+I+G+NE
C=consumption
I=Investment
G=Government
NE=Net Exports
As price decreases, what happens to AD? Why?
AD increases because consumption (C) increases
When consumers’ real income increases as a result of a decline in price, what happens to their spending habits?
Consumers will buy MORE goods and services C increases
Describe the interest rate effect
At lower price levels, interest rate falls as consumers borrow less
Lower interest rates stimulate ____ borrowing and loan-financed purchases
MORE
Under the interest rate effect, what 2 things in the AD equation increase?
Consumption and investment (consumers AND businesses borrow and finance)
What is aggregate supply?
The TOTAL QUANTITY of output producers are willing and able to supply at alternative price levels in a given time period
Describe the aggregate supply (AS) curve
Upwards sloping. Price level (AVERAGE PRICE) on Y axis and REAL OUTPUT (quantity/year) on X axis
Higher prices encourage _____ production
More
Give 2 reasons for the AS curve being upwards sloping
- Profit margins
- Costs
Explain why “Profit Margins” is considered a reason for the AS curve being upwards sloping
Higher product prices tend to widen producers’ profit margins so they will want to produce more and sell more goods
Explain why “Costs” is considered a reason for the AS curve being upwards sloping
Production costs tend to increase as producers try to produce more. Therefore, they must use existing equipment more extensively which causes them to get worn out. They need to replace the machine which causes them to spend lot of $ and thus price to consumer increases
_______ exists where PE=QE
Macro equilibrium
At QE, desired spending =…
Production
What are 2 potential problems with macro equilibrium?
- Undesirability
- Instability
Describe the macro equilibrium problem of undesirability
The price-output relationship at equilibrium may not satisfy our macroeconomic goals
In order to go closer to full employment (Qf), ____ has to go down which is undesirable
Price
What are the 3 undesirable outcomes?
-full-employment GDP
-Unemployment
-Inflation
Describe the potential problem of instability
Even if the designated macro equilibrium is optimal, it may be displaced by macro disturbances
Describe how macro disturbances can affect macro equilibrium
When aggregate demand shifts left, lower price levels and lower level of output result
When aggregate supply shifts left, higher price levels and less output
Apply a real life example to a leftward shift of the AS curve
Higher gas prices raise the cost of producing (airline, travel, deliveries, etc)
Thus, producers will be producing less at the same price/even higher price
Apply a real life example to a leftward shift of the AD curve
If someone makes the same amount of money from 2020-2021 but their tax percent increases by 10%, they will have less after tax income in their pocket and won’t spend as much
Describe what happens to the AD equation when the AD curve shifts to the left
C goes down, causing AD to go down
What is individual demand?
Ability and willingness to buy a good or service by an individual
What is market demand?
Total quantity demanded by all consumers for a SPECIFIC GOOD
What is aggregate demand?
The total quantity of output demanded for ALL GOODS AND SERVICES in a given economy
