Chapter 17 - Variations in economic activity- aggregate demand and aggregate supply

Question 1

Aggregate demand

Answer 1

The total value of planned spending on all domestically produced goods and services in an economy, per time period.

Question 2

AD curve

Answer 2

represents real national output produce at each price level, per time period

Question 3

Reasons for inverse relationship between general price level and real GDP

Answer 3

Pigou wealth effect
Keynes’s interest rate effect
Mundell-Fleming’s exchange rate effect

Question 4

Pigou wealth effect

Answer 4

for any given nominal value of income, lower prices allow for greater purchasing power -> consumption, investment, government exp.

Question 5

Keynes’s interest rate effect

Answer 5

fall in general price level causes interest rates to drop, boosting demand for money, ceteris paribus. ->greater aggregate demand

Question 6

Mundell-Fleming’s exchange rate effect

Answer 6

as general price level falls, rates fall, resulting in depreciation of exchange…increasing demand for net exports…raising level of AD, ceteris paribus

Question 7

Components of AD

Answer 7

AD = C + I + G + (X-M)

Question 8

Consumption

Answer 8

total spending on goods and services from households in the
domestic economy, per time period.

Question 9

Investment

Answer 9

expenditure of all firms in economy, to raise capital stock + production capacity -> higher productive capacity (LR)

Question 10

Government spending

Question 11

Net exports