Chapter 12 Flashcards
Define Aggregate Demand
a schedule or curve that shows the amount of a nations output (real GDP) that buyers collectively desire to purchase at each possible price level. When the price level rises, the quantity of real GDP demanded decreases; when the price level falls the quantity of real GDP demanded increases.
Define Aggregate Supply
a Schedule or curve showing the relationship between a nations price level and the amount of real domestic output that firms in the economy produce. This relationship varies depending on the time horizon and how quickly output prices and input prices can change.
Define Real Balances effect and why it makes a downward slope
A higher price level erodes the purchasing power of such assets, the public is poorer in real terms and will reduce its spending. So it doesn’t matter how much money people are getting it is the price and purchasing power that will affect the buying power.
Define Interest Rate Effect and why it makes a downward slope
A higher price level increases the demand for money. So, given a fixed supply of money, an increase in money demand will drive up the price paid for its use. That price is the interest rate.
Define Foreign purchases effect and why it makes a downward slope
When the U.S. price level rises relative to foreign price levels (and exchange rates do not respond quickly or completely), foreigners buy fewer U.S. goods and Americans buy more foreign goods.
(Demand) Define the Determinant Consumer spending
When consumers decide to buy more output at each price level, the aggregate demand curve will shift to the right and if they buy less output, the aggregate demand curve will shift to the left.
(Demand) Define the Determinant of Investment Spending
Investment spending (the purchase of capital goods) is a second major determinant of aggregate demand. A decline in investment spending at each price level will shift the aggregate demand curve to the left. An increase will shift to the right.
(Demand) Define the Determinant of Government Spending
Government purchases are the third determinant of aggregate demand. An increase in government purchases will shift the aggregate demand curve to the right. A decrease will shift to the left.
(Demand) Define the Determinant of Net Export Spending
Other things equal, higher U.S. exports mean an increased foreign demand for U.S. goods. So a rise in Net Exports shifts the demand curve to the right.
(Supply) Define the Determinant of input prices
Input or resource prices - to be distinguished from the output prices that make up the price level - are a major ingredient of per-unit production costs and therefore a key determinant of aggregate supply. These resources can be either domestic or imported. (cost of goods)
(Supply) Define the Determinant of Productivity
The relationship between a nation’s level of real output and the amount of resources used to produce that output.
Productivity = total output/total inputs
(Supply) Define the Determinant of Legal -Institutional Environment
(1)Changes in taxes and subsidies and (2)Changes in the extent of regulation.
