Chapter 12 Aggregate Demand & Supply

Question 1

What is a buisiness cycle?

Answer 1

changes in the economy that has a recession and expansion.
hard to pinpoint because the economy is always changing.

Question 2

What is Aggregate Demand?

Answer 2

comes from the consumer’s standpoint
shifts are caused by changes in C+I+G+NX

Question 3

What are 3 ways that AD shifts?

Answer 3

1. Wealth effect
   when purchacing power goes up, you can buy more
2. intrest rate effect: as prices increases, the price of borrowing increaces, investment falls
3. Exchange rate effect
   NX will fall due to more imports and less exports

Question 4

What is SRAS?

Answer 4

comes from the Firm’s standpoint of production
Shifts are caused by costs of produciton and supply shocks
prices can be sticky not wanting to adjust right away

Question 5

What is LRAS?

Answer 5

takes more time than SRAS
how long it takes for prices of inputs to fully adjust to changes in the economy
Shifts are caused by changes in Technology, Education, Labour, Capital, and Natural Resources
prices change but inputs do not.

Question 6

What do policy makers do?

Answer 6

they can intervene with AD and can sometimes mitigate the severeness of buisiness cycle by closing the Recessionary and inflationary gap.

Question 7

What is Stagflation?

Answer 7

High inflation combined with unemployment, resulting in decreacing output and increacing prices - this happens when SRAS shifts to the left.

Question 8

What is a shock?

Answer 8

a economic shift when significant events change the production and supply

Question 9

what are 3 types of shocks?

Answer 9

Demand Shock
changes that affect C,G,I,NX

Long run perminant shock
both SRAS and LRAS shifts
(global warming)

short run temperary shock
only SRAS shifts
(a drought destroys a crop shifting SRAS left, but with rain, it shifts back)