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Macroeconomics > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Aggregate Demand

curve

A

relationship between aggregate price level and quantity of aggregate output derived by household, firms, gov

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2
Q

Aggregate output

A

sum of all goods and services produced in an economy over a period of time (GDP)

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3
Q

aggregate price

A

overall price level of the economy

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4
Q

Why does the aggregate demand curve slope down

and 2 effects

A

the purchasing power of consumers and investors fluctuates as aggregate price increases and decreases.
1.wealth effect 2. Interest rate effect

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5
Q

Wealth effect and example

A

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

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6
Q

interest rate effect

A

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.

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7
Q

describe what happens to the AD curve and AE function as aggregate price decreases

A

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

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8
Q

When aggregate price level drops planned spending___at all output levels

A

rises

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9
Q

Name 5 ways that causes the AD curve to shift

A
  1. consumer and firm expectations
  2. wealth
  3. size of existing inventories
  4. Fiscal
  5. Monetary
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10
Q

Monetary policy and how it shifts AD

A

using changes in quantity of money or interest rate to stabilize economy

  1. increase in money leads to more lending of funds, lower interest rate and increase investment
  2. decrease in money leads to more borrowing, increases interest rate, and reduce investment
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11
Q

Fiscal policy and how it shifts AD

A

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
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12
Q

Aggregate Supply

A

total output/ total supply of goods and services produced within an economy at a given aggregate price

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13
Q

SRAS short run aggregate supply curve

A

relationship between aggregate price level and quantity of aggregate output/supply in short run

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14
Q

Sticky Wages

A

nominal wages that are slow to fall, even during a recession

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15
Q

nominal wages and are they flexible

A

dollar amount of wage paid, inflexible because of contracts

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16
Q

wage

A

worker compensation, salary, paid health care, benefits

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17
Q

why does SRAS slope upwards

A

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

18
Q

shifts of the SRAS curve (3)

A
  • change in inputs/commodity
  • change in nominal wages
  • change in productivity (number of workers, output)
19
Q

left shift and right shift of SRAS curve

A

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

20
Q

LRAS Long Run aggregate supply curve

A

relationship between aggregate price level and aggregate output supplied in long run

21
Q

LRAS key points (2)

A
  • all prices flexible (even wages)

- output is constant, price has no effect on output like it does in the short run

22
Q

Define Potential Output and is it LRAS or SRAS

A

level of real GDP economy would produce if all prices including wages were flexible is the output level of LRAS

23
Q

other names of potential output (3)

A

natural rate level of output
full employment level of output
long run equilibrium output

24
Q

describe the graph of actual and potential output

A

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.

25
Q

Output gap

A

when SRAS is not equal to LRAS

26
Q

How does the economy self correct for SRAS=LRAS,

(actual=potential) slides 28

A

wages adjust based on the scenario and will shift SRAS output to LRAS eqbm output

27
Q

short run macroeconomic eqbm
short run equilibrium price level
short run equilibrium output level

A

AD=SRAS
price corresponding to AD=SRAS
quantity corresponding to AD=SRAS

28
Q

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)

A

quantity supplied exceeds demand (surplus)

quantity supplied is less then demand (shortage)

29
Q

Demand Shock *examples on 31

A

shift of AD Curve

30
Q

Positive Demand Shock what happens to aggregate p and q

A

right shift of AD curve, aggregate price increase, aggregate output increase

31
Q

Negative Demand Shock what happens to aggregate p and q

A

left shift of AD curve, aggregate price decrease, aggregate output decrease

32
Q

Supply Shock *examples on 32

A

shift of SRAS Curve

33
Q

positive supply shock

A

right shift of supply curve, aggregate price decrease, aggregate output increase

34
Q

negative supply shock

A

left shift of supply curve, aggregate price increases, aggregate output decrease.

35
Q

Stagflation (negative supply shock) are they rare

A

recession and inflation and yes they are rare

36
Q

how can governments counteract supply shocks

A

cause demand shocks through monetary and fiscal policy

37
Q

Long Run Macroeconomic Equilibrium

A

AD=AS=SRAS=LRAS (Actual Output=Potential)

38
Q

Output Gaps in the Short Run examples and definition

more info on slides 36,37

A

recessionary gap: SR aggregate output < LR potential output

inflationary gap: SR aggregate output > LR potential output

39
Q

Economy self corrects but in the LR we are

A

all dead, recession people lose jobs, inflation people suffer from high prices

40
Q

Stabilization Government Policy

A

Way to push economy back to potential output quicker then self correction

41
Q

negative supply shocks create a policy dilemma because

A

pushing the AD curve for one problem affects the other

42
Q

what are the 2 dilemmas for negative supply (stabilize increase in price or stabilize decrease in quantity)

A

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

Macroeconomics (10 decks)

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