Chapter 12 Flashcards
Aggregate Demand
The total demand for all goods and services in the economy.
Aggregate Demand Curve
A curve that shows the relationship between the overall price level and the level of demand in the economy.
What does Aggregate Demand made up of?
Y = Consumers + Investments + Government Spending + NX
AD Curve Slope Downward
There exists a negative relationship between price level and national expenditure for Consumer, Investment and Net Exports.
The Wealth Effect
If prices increase but incomes do not, purchasing power of income will fall, so consumption spending will fall.
The Interest Rate Effect
As prices increase, the price of borrowing tends to rise as well so investment spending will fall.
The Exchange Rate Effect
Increased prices of Canadian goods mean higher export prices and lower sales while imports into Canada will rise so net exports will fall.
Aggregate Supply Curve
Shows the relationship between the overall price level in the economy and total production.
Represents production as a whole.
SRAS
Changes in price level affect the economy’s output.
When price increase, input prices adjust slowly in response to changes in the economy - this tends to raise the quantity of goods and services supplied.
If wages are sticky, firms have an incentive to increase production when the prices of their output are rising.
- This give rise to DRAS that is upward sloping.
LRAS
Depends on its resource endowments (supplies of labor, capital, natural resources) and available technology used to turn these inputs into goods and services.
Stagflation
A period of decreasing in output and increasing prices.
Inflationary Gap
Output and prices are higher (The output gap).
Recessionary Gap
Output is lower and prices are higher (output gap).
Put downward pressure on wages (higher unemployment), SRAS shifts to the right
LRAS that is vertical
At its potential or full employment.
The Effect of a Shift in AS
Shifts in AS can cause stagflation.
Policymakers who intervene AD can cause inflation.
