Chapter 14 - AGGREGATE DEMAND AND AGGREGATE SUPPLY Flashcards
What is Recession?
Recession is a period of falling incomes and rising unemployment.
What is Depression?
Depression is a severe recession.
What are the three key facts about economic fluctuations?
Fact 1: Economic fluctuations are irregular and unpredictable.
Fact 2: Most macroeconomic quantities fluctuate together.
Fact 3: As output falls, unemployment rises.
What does the model of aggregate demand and aggregate supply try to explain by economists?
The model most economists use to explain short-run fluctuations in economic activity around its long-run trend.
What are the three key facts about economic fluctuations?
Fact 1: Economic fluctuations are irregular and unpredictable.
Fact 2: Most macroeconomic quantities fluctuate together.
Fact 3: As output falls, unemployment rises.
(All these variables are moving together).
What does the Aggregate-Demand curve explain?
Everything that is spending goes under this curve. The curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level.
What does the Aggregate-Supply curve explain?
The curve shows the quantity of goods and services that firms choose to produce and sell at each price level.
How does the behavior in the short run differ from its behavior in the long run?
In the long run the variables will not be that effected. But in the short run the variables will affect.
Why the aggregate-demand curve might shift?
Changes in:
-consumption
-investment
-government purchases
-net exports
What happens to the aggregate-demand curve in the following scenario?
A ten year old investment tax credit expires.
Aggregate demand will go down. Shift to the left. Because investment will go down. Investment falls, AD curve shifts to the left.
What happens to the aggregate-demand curve in the following scenario?
The Canadian exchange rate falls.
NX Increase, AD curve shifts to the right.
What happens to the aggregate-demand curve in the following scenario?
A fall in prices increases the real value of consumers’ wealth.
Moving along the curve and buy more. Prices goes down, the money that you have will be more when the prices are falling (wealth-effect).
What happens to the aggregate-demand curve in the following scenario?
Provincial governments replace sales taxes with new taxes on interest, dividends, and capital gains.
Consumption rises, AD curve shifts to the right.
Why the aggregate-supply curve is vertical in the LONG run?
An economy’s production of goods and services in the long run depends on its suppliers of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services.
Why the LONG-run aggregate-supply curve might shift?
The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.
-Potential output
-Full- employment output
-Changes in labor, capital, natural resources, technical knowledge.
