Chapter 12: Aggregate Demand and Aggregate Supply

Question 1

Aggregate demand curve (ADC)

Answer 1

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the govt and the rest of the world

Question 2

Why does ADC slope downward?

Answer 2

1. wealth effect of a chg in the aggregate price level

2. interest rate of a chg in agg price level

Question 3

Consumer/firms factors that shift ADC

Answer 3

If cons/firms become > optimistic, ADC increases

If cons/firms bec > pessimistic, ADC decreases

Question 4

Wealth factors that shift ADC

Answer 4

If real value of household assets rises, ADC increases;

if falls, ADC falls

Question 5

Existing stock of physical capital that shift ADC

Answer 5

If existing of phys capital is small, ADC increases

If large, ADC decreases

Question 6

Fiscal policy factors that shift ADC

Answer 6

If govt spending increases or taxes are cut, ADC increases

If reduces spending or increases taxes, ADC decreases

Question 7

Monetary policy factors that shift ADC

Answer 7

IF central bank increases the amount of money, ADC increases

IF reduces amount of money, ADC decreases

Question 8

Aggregate supply curve

Answer 8

shows the relationship between aggregate price level and the quantity of aggregate output in the economy

Question 9

Nominal wage

Answer 9

$ amount of wage paid

Question 10

Sticky wages

Answer 10

nominal wages that slow to fall even in face of high unemployment and slow to rise even in face of labor shortages

Question 11

Short-run aggregate Supply Curve

Answer 11

upward-sloping because nominal wages are sticky in the short run: a higher aggregate price level leads to higher profits and increased aggregate output in the short run.