Chapter 13 - Aggregate Supply & Demand

Question 1

Aggregate Demand:

Aggregate Supply:

Answer 1

Consumer, Spending Growth.

Businesses, Firms.

Question 2

Business Fluctuations:

Recession:

Answer 2

Fluctuations in the growth rate of real
GDP around its trend growth rate.

A significant, widespread decline in real
income (corrected for inflation) and
employment.

Question 3

Aggregate Demand Curve:

Answer 3

shows all the combinations of inflation
and real growth that are consistent with
a specified rate of spending growth, (M-> +V-> = P-> + Yr-> or M-> +V-> = Inflation + Real Growth)

Question 4

Increases in spending growth, M-> and/or V->, shifts the AD curve to the ___.

Answer 4

Right.

Question 5

Decreases in spending growth, M<- and/or V<-, shifts the AD curve to the ___.

Answer 5

Left.

Question 6

The Solow Growth Rate:

The long run aggregate supply curve
(LRAS):

Answer 6

An economy’s potential growth rate, the rate of
economic growth that would occur given flexible
prices and the existing real factors of production.

The LRAS is vertical at the Solow growth rate.

Question 7

An economy’s potential growth rate is called:

Answer 7

The Solow Growth Rate

Question 8

A positive shock to LRAS results in a ___ real growth rate and ___ inflation.

A negative shock to LRAS results in a ___ real growth rate and ___ inflation.

Answer 8

Higher, Lower

Lower, Higher

Question 9

The Short Run Aggregate Supply Curve SRAS:

Answer 9

Shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky.

Question 10

Sticky Wages:

Answer 10

Wages that do not change while the economy is changing.

Question 11

Menu Costs:

Answer 11

The costs of changing prices. (To keep customer’s happy)

Question 12

Aggregate Demand Shock:

Answer 12

A rapid and unexpected shift in the AD curve (spending).

Question 13

Nominal Wage Confusion:

Answer 13

When you look at your nominal paycheck without correcting it for inflation.

Question 14

The Great Depression:

Answer 14

• Primarily due to a large fall in aggregate demand.
• In 1929, the U.S. market crashed.
• The Smoot-Hawley Tariff in 1930, taxed foreign goods, leading to other countries retaliating and U.S. exports falling.

Question 15

Real Shocks on the Great Depression:

Answer 15

• The “Dust Bowl” - A severe drought.
• Less farming, no water.
• Tariffs, trading being less effective.
• The National Industrial Recover Act - Prices couldn’t be lowered.

Question 16

Real shocks are analyzed through shifts in the ___ curve, while aggregate demand shocks are analyzed using shifts in the __ curve.

Answer 16

LRAS, AD