Chapter 12: Chapter 12 Aggregate Demand and Aggregate Supply Flashcards
What is the AD-AS model?
The aggregate demand–aggregate supply (AD–AS) model is a macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and real GDP.
Define aggregate demand.
Aggregate demand is a curve that shows the total amount of a nation’s output (real GDP) that buyers collectively wish to purchase at each possible price level.
Why does the aggregate demand curve slope downward?
Unlike demand for individual products, aggregate demand slopes downward due to the real-balances effect, interest-rate effect, and foreign purchases effect.
What is the real-balances effect?
The real-balances effect is the tendency for increases in the price level to reduce the real value of financial assets, which decreases total spending and real output.
What is the interest-rate effect?
The interest-rate effect occurs when a higher price level increases the demand for money, raises interest rates, and thus reduces spending and real output.
What is the foreign purchases effect?
The foreign purchases effect refers to how a higher domestic price level makes exports more expensive and imports cheaper, reducing net exports and aggregate demand.
How does consumer wealth affect aggregate demand?
An increase in consumer wealth shifts the aggregate demand curve right due to a wealth effect, while a decrease in wealth shifts it left.
How do consumer expectations influence aggregate demand?
Positive expectations about future income or prices increase current consumption, shifting AD right; negative expectations reduce consumption, shifting AD left.
What effect does household borrowing have on aggregate demand?
Increased borrowing shifts aggregate demand right, while reduced borrowing or increased savings for debt repayment shifts it left.
How does a change in real interest rates affect aggregate demand?
Higher real interest rates raise borrowing costs, reducing investment and aggregate demand, while lower rates do the opposite.
How do expected returns influence aggregate demand?
Higher expected returns encourage investment, shifting AD right; lower expected returns discourage investment, shifting AD left.
What role does government spending play in aggregate demand?
Increased government spending shifts AD right, while decreased spending shifts it left.
How do changes in net export spending affect aggregate demand?
Higher net exports increase aggregate demand, shifting AD right; lower net exports reduce AD, shifting it left.
How does national income abroad affect aggregate demand?
Rising income abroad increases foreign demand for domestic goods, shifting AD right; declining foreign income reduces AD, shifting it left.
What is the effect of dollar depreciation on aggregate demand?
Dollar depreciation makes U.S. goods cheaper abroad, increasing exports and net exports, thus shifting aggregate demand right.
What is the multiplier effect in the context of aggregate demand?
The multiplier effect magnifies an initial change in spending, causing a larger overall change in aggregate demand.
What is Aggregate Supply (AS)?
Aggregate supply is a curve showing the relationship between a nation’s price level and the quantity of real domestic output (real GDP) that firms produce.
What are the three time horizons for Aggregate Supply?
1) Immediate Short Run, 2) Short Run, 3) Long Run.
What characterizes the Immediate Short Run in Aggregate Supply?
Both input prices and output prices are fixed.