Chapter 12 - Aggregate Demand and Aggregate Supply

Question 1

Aggregate Demand Curve

Answer 1

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

Question 2

Why is the aggregate demand curve downward sloping?

Answer 2

Wealth effect: ↑ Prices => ↓ Value of wealth => ↓ Consumption

Movements: Interest rate effect:↑ Prices => ↑ Money demand =>↑ Interest rates => ↓ C, ↓ I

Question 3

Shifts of the Aggregate Demand Curve

Answer 3

Changes in expectations: ↑ Optimism of consumers and firms => ↑ Aggregate demand

Changes in wealth: ↑ Real value of household assets => ↑
Aggregate demand

Size of the existing capital stock: ↑ size of capital stock => ↓ Aggregate demand

Fiscal policy: ↑ Government purchases or ↓ Taxes => ↑ Aggregate demand

Monetary policy: ↑ Quantity of assets from central bank => ↑ Aggregate demand

Question 4

Aggregate Supply Curve

Answer 4

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

Question 5

Short-run Aggregate Supply Curve

Answer 5

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

Question 6

Why is the short-run aggregate supply curve upward sloping?

Answer 6

Movements: Sticky wages: ↑Prices =>↑Revenue but unchanged labor cost => ↑ Profit per unit of output => ↑Output

Question 7

Shifts of the Short-run Aggregate Supply Curve

Answer 7

Changes in commodity prices: ↑ Commodity prices => ↓Aggregate supply

Changes in nominal wages: ↑ Nominal wages => ↓Aggregate supply

Changes in productivity: ↑ Productivity of workers => ↑Aggregate supply

Question 8

Long-run Aggregate Supply Curve

Answer 8

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

Question 9

Potential Output

Answer 9

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

Question 10

Short-run Macroeconomic Equilibrium

Answer 10

when the quantity of output supplied is equal to the quantity demanded

Question 11

Short-run Equilibrium Aggregate Price Level

Answer 11

the aggregate price level in the short-run macroeconomic equilibrium

Question 12

Short-run Equilibrium Aggregate Output

Answer 12

the quantity of aggregate output produced in the short-run macroeconomic equilibrium.

Question 13

Demand Shock

Answer 13

an event that shifts the aggregate demand curve

Question 14

Supply Shock

Answer 14

an event that shifts the short-run aggregate supply curve

Question 15

Stagflation

Answer 15

the combination of inflation and falling aggregate output

Question 16

Long-run Macroeconomic Equilibrium

Answer 16

when the short-run macroeconomic equilibrium is on the long-run aggregate supply curve

Question 17

Recessionary Gap

Answer 17

when aggregate output is below potential

Question 18

Inflationary Gap

Answer 18

when aggregate output is above potential output

Question 19

Output Gap

Answer 19

the percentage difference between actual aggregate output and potential output

Question 20

Output Gap =

Answer 20

Actual aggregate output −Potential output)/(Potential output)) ×100

Question 21

Self-Correcting

Answer 21

when shocks to aggregate demand affect aggregate output in the short run, but not the long run

Question 22

Stabilization Policy

Answer 22

the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

Question 23

Which shock poses and issue for policy

Answer 23

Negative Supply Shock due to fighting slumps in aggregate output worsens inflation and vice versa.