Chapter 11 - The Aggregate Supply and Demand Model

Question 1

Say’s law

Answer 1

Supply creates its own demand

Question 2

Neoclassical economists

Answer 2

economists who emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run (basically those who believe in Say’s law)

Question 3

Keynes’ law

Answer 3

Demand creates its own supply

Question 4

Keynesian economists

Answer 4

economists who emphasize the importance of aggregate demand in determining the size of the macroeconomy over the long run (basically those who believe in Keynes’ law)

Question 5

What view modern economists take

Answer 5

Keynesian in the short run, and neoclassical in the long run

Question 6

Aggregate supply and demand model

Answer 6

shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level

Question 7

Aggregate supply (AS)

Answer 7

Quantity of output that businesses will produce and sell

Question 8

Aggregate supply curve

Answer 8

Quantity of output that businesses will produce and sell at each price level

Question 9

AS curve graph components

Answer 9

Horizontal: real GDP
Vertical: price level
Vertical line: potential GDP
Supply curve: sloping up

Question 10

Problems at running past potential GDP

Answer 10

certain firms and industries will start running into limits, all of the expert workers in a certain industry will have jobs or factories in certain geographic areas or industries will be running at full speed. It will burn out eventually

Question 11

Another term for potential GDP (first)

Answer 11

Full employment

Question 12

Aggregate demand (AD)

Answer 12

Total spending on domestic goods and services in an economy (also called total planned expenditure)

Question 13

Four components of AD

Answer 13

Consumption, investment, government spending, and net exports

Question 14

Aggregate demand curve

Answer 14

Spending on domestic goods and services at each price level

Question 15

AD curve components

Answer 15

Horizontal: real GDP
Vertical: price level
Demand curve: sloping steep down

Question 16

Another term for AS curve

Answer 16

Short run aggregate supply curve

Question 17

Another term for potential GDP at the vertical line (second)

Answer 17

Long run aggregate supply curve

Question 18

Three reasons aggregate demand slopes downward

Answer 18

The wealth affect (prices go up so wealth goes down), interest rate affect (higher prices raises interest rates), foreign price affect (higher prices makes domestic product more expensive)

Question 19

Most important factor for shifting the AS curve

Answer 19

Productivity growth

Question 20

How productivity is measured

Answer 20

GDP per capita

Question 21

3 things the inward shifting of equilibrium can cause

Answer 21

Reduced GDP or recession, higher unemployment, higher inflation

Question 22

Stagflation

Answer 22

Stagnant economy with high unemployment and inflation

Question 23

3 things the outward shifting of equilibrium can cause

Answer 23

Lower inflation, higher output, and lower unemployment

Question 24

Higher business confidence is related to…

Answer 24

Higher consumption and investment demand

Question 25

Cyclical unemployment is relatively large in the AD/AS framework when the equilibrium is…

Answer 25

Below potential GDP

Question 26

Cyclical unemployment is small in the AD/AS framework when the equilibrium is…

Answer 26

Near potential GDP

Question 27

How the balance of trade appears in the AD/AS diagram

Answer 27

Indirectly through changes in imports and exports

Question 28

Movement from one equilibrium to another causes the price level to rise or to fall

Answer 28

Pressures for inflation in the AD/AS diagram

Question 29

Three zones on the diagram

Answer 29

Neoclassical, Keynesian, and intermediate

Question 30

Keynesian zone

Answer 30

Far left of SRAS that is relatively flat, equilibrium level of real GDP is far below potential GDP, economy is in recession, inflation is not a big worry

Question 31

Neoclassical zone

Answer 31

Far right of SRAS that is near vertical, cyclical unemployment is low, shifts in AD create inflationary pressures

Question 32

Intermediate zone

Answer 32

AD to the right, output is closer to potential GDP, reduced unemployment, higher price level and upward pressure on inflation (and vice versa)