Chapter 12 Flashcards
staglation
combination of high inflation and rising unemployment
demand shocks
Short-run economic fluctuations
Aggregate demand curve
Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world
Wealth effect of a change in the aggregate price level
The effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of counsumers assets
Aggregate price level up
Consumer spending Down
*leads to downward-sloping aggregate demand curve
Interest rate effect of a change in the aggregate price level
The effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of conusmers’ and firms’ money holdings
interest rate up
consumption down
*leads to downward-sloping aggregate demand curve
When consumers and firms become more optimsitic
aggregate demand increases
When the real value of household assets rises…
aggregate demand increases
When the existing stock of physical capital is relatively small….
aggregate demand increases
When consumers and firms become more pessimistic
aggregate demand decreases
When real value of household assets falls
aggregate demand decreases
When existing stock of physical capital is relatively large
aggregate demand decreases
When the government increases spending or cuts taxes
aggregate demand increases
When the government reduces spending or raises taxes
aggregate demand decreases
When the central bank increases the quantity of money
aggregate demand increases
When the central bank reduces the quantity of money…
aggregate demand decreases
The prime rate
The interest rate banks charge their best customers
aggregate supply curve
Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
Profit per unit of output =
Price per unit of output - production cost per unit of output
Wages
Refers to all forms of worker compensation, such as employer-paid health care, and retirement benefits in addition to earnings
nominal wage
the dollar amount of the wage paid
Sticky wages
Nominal wages that are slow to fall even in the face of high unemployment and slow to rise in the face of labor shortages
Perfectly competitive markets
Producers take prices as given
Imperfectly competitive markets
Producers have some ability to choose the prices they charge
Short-run aggregate supply curve
Shows the relationship between the aggregate price level and quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed
average nominal wage
the nominal wage averaged over all workers in the economy
*falls when there is a steep rise in unemployment
When commodity prices fall
aggregate supply increases
When commodity prices rise
aggregate supply increases
When nominal wages fall
aggregate supply increases
When nominal wages rise
aggregate supply decreases
When workers become more productive
aggregate supply increases
When workers become less productive
aggregate supply decreases
Changes in the aggregate price level _____________________________
do not change the quantity of aggregate output supplied in the long run
Long run
the period of time over which all prices are fully flexible
Long-run aggregate supply curve
Shows the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible
LRAS is ________
vertical at it’s potential output
potential output
The level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible
AD-AS Model
The aggregate supply curve and aggregate demand curve are used together to analyze economic functions
Short-run macroecnomic equilibrium
When quantity of aggregate output supplied is equal to quantiy demanded
Short run equilibrium aggregate price level
The aggregate price level in the short-run macroeconomic equilibrum
price level at Esr, Pe
Short-run equilibrium aggregate output
The quantity of aggregate output produced in the short-run macroeconomic equilibrium
Esr, Ye
Pe
Short run equilibrium aggregate price level
Ye
Short-run equilibrium level of aggregate output
Demand shock
An event that shifts the aggregate demand curve
stagflation
The combination of inflation and falling aggregate output
Long-run macroeconomic equilibrium
When the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve
Recessionary gap
When aggregate output is below potential output
In the end, the economy is ____________ in the long run
self-correcting
inflationary gap
When aggregate output is above potential output
Output gap
The percentage difference between actual aggregate output and potential output
Actual aggregate output - potential output
potential output X100
*Tends to go towards zero
Economy is self correcting
When shocks to aggregate demand affect aggregate output in the short run, but not the long run
Stabilization policy
The use of government policy to reduce the severity of recessions and rein in excessively strong expansions
