Chapter 13: The Aggregate Demand - Aggregate Supply Model Flashcards
Two paths of study in macroeconomics:
(1) Long-run growth and development
(2) Short-run fluctuations, or business cycles
Focuses on theories that affect economies over several decades
Long Run Growth and Development
Focuses on time horizons of five years or less
Short Run Growth Fluctuations or Business Cycles
GDP during expansions:
Positive
GDP during recessions:
Negative
Unemployment in expansions:
Falls
Unemployment in recessions:
Rises
The total demand for final goods and services in an economy
Aggregate Demand
Three Reasons Why Quantity of AD and Price Level are Negative:
(1) The Wealth Effect
(2) The Interest Rate Effect
(3) The International Trade Effect
The change in quantity of aggregate demand that results from wealth changes due to price level changes.
Wealth Effect
Occurs when a change in the price level leads to a change in interest rates and therefore in quantity of aggregate demand.
Interest Rate Effect
The net value of one’s accumulated assets
Wealth
The interest rates effect occurs through the _____________.
Loanable Funds Market
Occurs when a change in the price level leads to a change in the quantity of net exports demanded
International Trade Effect
Shift Factors in Aggregate Demand:
(1) Consumption
(2) Investment
(3) Government Spending
(4) Net Exports
Consumption is influenced by:
(1) Changes in real wealth
(2) General Expectations about the future
(3) Changes in taxes
Investment is influenced by:
(1) Investor Confidence
(2) Interest Rates
(3) Quantity of Money in the Economy
Government spending is influenced by:
Policymakers
Net Exports influenced by:
Shifts in response to changes in foreign income and the exchange value of the U.S. dollar
Movements along the aggregate demand curve are caused by ________.
Change in the price level
T or F: Shifts in the aggregate demand curve occur when something other than the price level changes.
True
Aggregate Supply changes are measured in:
(1) Short term
(2) Long term
A time period sufficient enough for all prices to adjust
Long term
u*
The level of output produced when an economy is at the natural rate of unemployment
What shifts the long run aggregate supply curve?
(1) Resources
(2) Technology
(3) Institutions
The period of time in which some prices have not yet adjusted
Short Run
Three reasons why there is a positive relationship between the price level and the quantity of aggregate supply:
(1) Sticky Input Prices
(2) Menu Costs
(3) Money Illusions
The cost of changing prices
Menu Costs
Occurs when people interpret nominal changes in wages or prices as real changes. As discussed, this is false.
Money Illusion
T or F: Whenever the long run aggregate supply curve shifts, it takes the short run aggregate supply curve with it.
True
Factors that shift only the short run aggregate supply curve:
(1) Changes in resource prices
(2) Changes in expectations of prices
(3) Supply Shocks
Surprise events that change a firm’s production costs
Supply Shock
Reached when the quantity of aggregate demand is equal to the quantity of aggregate supply in the short and long run.
Long Run Equilibrium
LRAS = SRAS = AD
Long Run Equilibirum
Economy is at full employment and the unemployment rate is equal to the natural rate.
Long Run Equilibrium
