chapter 23 Flashcards
What does an increase in P cause in terms of private sector wealth and effect on net exports?
An increase in P thus reduces private-sector wealth:
• reduction in desired consumption
• downward shift in AE curve (reduces desired aggregate expenditure)
There is also an effect on net exports:
• the NX function shifts downward
• further downward shift in AE curve
Conversely for a fall in P
what does a fall in P do with regards to the real value of money holdings?
it raises the real value of money holdings
- Much of private
sectors total wealth is held in the form of assets with a fixed nominal value.
aggregate demand curve relates equilibrium real GDP to what?
the price level
For any given P, the AD curve shows the level of real GDP for which desired aggregate expenditure equals actual GDP.
Changes in the price level cause movements along the AD curve.
Why is the aggregate demand (AD) negatively sloped? (two reasons)
- A fall in the price level leads to a rise in private sector wealth, which increases desired consumption and thus leads to an increase in equilibrium GDP.
- A fall in the price level (for a given exchange rate) leads to a rise in net exports and thus leads to an increase in equilibrium GDP.
Any shock that increases
equilibrium GDP at a
given price level shifts the AD curve to the ________
right
- The horizontal shift of
the AD curve is the simple multiplier times the change in autonomous spending
What does the AD curve say nothing about
It says nothing about whether producers would want to produce
that income, only that if it is produced, purchasers will be willing to
buy it.
describe the AS curve
The AS curve relates the price level to the quantity of output that
firms would like to produce and sell.
The AS curve is drawn for a given:
• level of technology
• set of factor prices
As unit costs rise with output, firms will produce more output only if prices increase:
–> AS curve is upward sloping
Describe the upward slope of the AS curve
The slope of the AS curve is increasing as output rises:
• when output is low, firms typically have excess capacity –> costs do not rise quickly
• when output is nearer Y*, costs rise as output rises –> firms need higher
prices
What causes the AS curve to shift up?
anything that increases firms’ costs:
- factor prices
- technology
Where is demand behaviour consistent with supply behaviour?
- at the intersection of the two curves
- macroeconomic equilibrium
expansionary or contractionary shocks refer to what with regards to the AD and AS curves
-shifts the direction of the AD or AS curve
“expansionary” or “contractionary” refers to
the effect on __________
equilibrium output
demand shocks cause what?
P and Y to change in
the same direction.
What are some possible causes of demand shocks
Possible causes: • ΔG > 0 • ΔI > 0 • ΔX > 0 • ΔC > 0
Describe the mechanics of an AD shift
The shock causes the AE curve to shift upward, but the rise in the price level causes it to shift down.
With an upward sloping AS curve, the multiplier is smaller than the simple
multiplier.
Describe the mechanics of an AD shift in steps
- The equilibrium is at point E0 in both parts.
- These equilibrium is at price P0
- Without changing the level of prices. We still have P0
- There is Δ A.
- AE shifts up.
- We change to a new equilibrium: E’ 1
- This will shift AD to the right
- Remember we are still with P0
- Look at the second graph: E1 is not an equilibrium point.
The forces in the market will
move the economy out of this
point and will bring it to a new
equilibrium - This new equilibrium is
associated to a new level of
prices: P1 - The increase in prices will
reduce AE. Why? Channels? - And we shift AE
1 to AE1
The effect of any given shift of the AD curve will depend on what?
depend on the slope of the AS curve.
The steeper the AS curve,
the greater the price effect and the smaller the output effect.
Aggregate supply shocks cause what?
cause P and Y to change in opposite directions
what are the possible causes of AS shocks?
- Δ price of inputs
- Δ wages
- Δ technology
Many economic events (especially changes in the world prices
of ________) cause both aggregate demand and aggregate
supply shocks.
The overall effect on the economy depends on the ________
raw materials
depends on th relative importance of the two separate effects.
