Chapter 12 Flashcards
Aggregate Demand
curve
relationship between aggregate price level and quantity of aggregate output derived by household, firms, gov
Aggregate output
sum of all goods and services produced in an economy over a period of time (GDP)
aggregate price
overall price level of the economy
Why does the aggregate demand curve slope down
and 2 effects
the purchasing power of consumers and investors fluctuates as aggregate price increases and decreases.
1.wealth effect 2. Interest rate effect
Wealth effect and example
effect on consumer spending due to change in purchasing power caused by change in aggregate price
ex as aggregate price increases, purchasing power decreases leading to lower consumption
interest rate effect
higher aggregate price level means firms and consumers need more money for standard basket investment, borrowing of money increases leading to less funds available which increase interest rate and low investment.
describe what happens to the AD curve and AE function as aggregate price decreases
the aggregate expenditure will shift up as the average consumer can spend more money, the aggregate demand will be a movement down along the curve
When aggregate price level drops planned spending___at all output levels
rises
Name 5 ways that causes the AD curve to shift
- consumer and firm expectations
- wealth
- size of existing inventories
- Fiscal
- Monetary
Monetary policy and how it shifts AD
using changes in quantity of money or interest rate to stabilize economy
- increase in money leads to more lending of funds, lower interest rate and increase investment
- decrease in money leads to more borrowing, increases interest rate, and reduce investment
Fiscal policy and how it shifts AD
changes in gov spending to stabilize economy
- increase in spending cuts taxes and allows consumer to spend more
- decrease in spending creates more taxes and consumers spend less
Aggregate Supply
total output/ total supply of goods and services produced within an economy at a given aggregate price
SRAS short run aggregate supply curve
relationship between aggregate price level and quantity of aggregate output/supply in short run
Sticky Wages
nominal wages that are slow to fall, even during a recession
nominal wages and are they flexible
dollar amount of wage paid, inflexible because of contracts
wage
worker compensation, salary, paid health care, benefits
why does SRAS slope upwards
because of sticky wages, as the aggregate price level of products change, the production cost don’t change or the wages so in order to maximize profit firms must change their output to fluctuate spending on materials
shifts of the SRAS curve (3)
- change in inputs/commodity
- change in nominal wages
- change in productivity (number of workers, output)
left shift and right shift of SRAS curve
production cost increase leads to less profit, producers reduce quantity of output willing to supply at all given price
production cost decrease leads to more profit, producers increase quantity of output willing to supply at all given price
LRAS Long Run aggregate supply curve
relationship between aggregate price level and aggregate output supplied in long run
LRAS key points (2)
- all prices flexible (even wages)
- output is constant, price has no effect on output like it does in the short run
Define Potential Output and is it LRAS or SRAS
level of real GDP economy would produce if all prices including wages were flexible is the output level of LRAS
other names of potential output (3)
natural rate level of output
full employment level of output
long run equilibrium output
describe the graph of actual and potential output
potential (LRAS) and actual (SRAS) increase over time with actual either being above, below, or equal to potential. (On SRAS but not LRAS). In the long run actual tries to self correct to potential.
Output gap
when SRAS is not equal to LRAS
How does the economy self correct for SRAS=LRAS,
(actual=potential) slides 28
wages adjust based on the scenario and will shift SRAS output to LRAS eqbm output
short run macroeconomic eqbm
short run equilibrium price level
short run equilibrium output level
AD=SRAS
price corresponding to AD=SRAS
quantity corresponding to AD=SRAS
if SRAS aggregate price level > equilibrium LRAS price
if SRAS aggregate price level < equilibrium LRAS price (what is the effect on quantity in the short run)
quantity supplied exceeds demand (surplus)
quantity supplied is less then demand (shortage)
Demand Shock *examples on 31
shift of AD Curve
Positive Demand Shock what happens to aggregate p and q
right shift of AD curve, aggregate price increase, aggregate output increase
Negative Demand Shock what happens to aggregate p and q
left shift of AD curve, aggregate price decrease, aggregate output decrease
Supply Shock *examples on 32
shift of SRAS Curve
positive supply shock
right shift of supply curve, aggregate price decrease, aggregate output increase
negative supply shock
left shift of supply curve, aggregate price increases, aggregate output decrease.
Stagflation (negative supply shock) are they rare
recession and inflation and yes they are rare
how can governments counteract supply shocks
cause demand shocks through monetary and fiscal policy
Long Run Macroeconomic Equilibrium
AD=AS=SRAS=LRAS (Actual Output=Potential)
Output Gaps in the Short Run examples and definition
more info on slides 36,37
recessionary gap: SR aggregate output < LR potential output
inflationary gap: SR aggregate output > LR potential output
Economy self corrects but in the LR we are
all dead, recession people lose jobs, inflation people suffer from high prices
Stabilization Government Policy
Way to push economy back to potential output quicker then self correction
negative supply shocks create a policy dilemma because
pushing the AD curve for one problem affects the other
what are the 2 dilemmas for negative supply (stabilize increase in price or stabilize decrease in quantity)
to stabilize increase in price we must decrease demand which leads to further recession but curbs inflation
to stabilize decrease in output we must increase demand which leads to further inflation but curbs recession
