Chapter 28 Aggregate Supply and Demand Flashcards
What is stagflation?
A combination of unacceptably high inflation and rising unemployment.
What does the aggregate demand curve represent?
The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households businesses the government and everybody.
Why does the aggregate demand curve slope downward?
Because of the wealth effect and the interest rate effect.
What is the effect on consumer spending caused by the effect of a change in the aggregate price level?
The wealth effect. (how inflation effects one’s nominal purchasing power)
If a rise in the aggregate price level lowers aggregate purchasing power, how does this affect interest rates?
Interest rates rise because in order for people to purchase the same as before they must borrow or sell bonds.
What is a rise in the interest rate due to increased aggregate price levels called?
The interest rate effect.
What is the function of the AD curve?
To relate the overall demand for G&S to the overall price level. The aggregate spending at different price levels.
What factors shift the AD curve?
Changes on expectations (consumer and business optimism or pessimism)
Changes in wealth (the real value of household assets)
The size of the existing stock of capital
Fiscal policy
Monetary policy
What is fiscal policy?
How the gvt. Spends its money and taxes.
What is monetary policy?
The central banks domain. Ie quantity of money supply etc.
How does a change in the aggregate price level effect the AD curve?
It is movement along it.
How does a change in wealth affect the AD curve?
It shifts it
How do gvt. Changes in spending affect the AD curve?
Directly. Gvt. spending is included in the calculation of GDP therefore any increase in G is an equivalent increase in GDP.
How does a change in taxes or gvt. transfers affect an economy?
Indirectly. They affect disposable income.
How does increasing the money supply affect consumer spending?
It drives the interest rate down for any aggregate price level. This increases investment spending and consumer spending.
How does a decrease in the money supply affect consumer spending?
It increases the interest rate. Is decreases investment spending and consumer spending.
What is the prime rate?
The interest rate that banks charge their best customers.
What is the function of the AS curve?
To show the relationship between aggregate price level and the quantity of aggregate output supplied in the economy.
Define profitable output.
Profitable output = price per unit of output - production cost per unit of output
What is it called when nomianl wages are slow to fall in the face of high unemployment and slow to rise in labor shortages?
Sticky wages. They are the result of the lag time involved in changing existing employment contracts.
What is the short run aggregate supply curve?
The short run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.
What factors shift the aggregate supply curve?
Changes in commodity prices
Changes in nominal wages
Changes in productivity
Why are commodities not included in the calculation of the aggregate price level?
They are not final products.
What is the difference between short run and long-run aggregate supply curves?
There are no sticky wages in the long run. Changes in aggregate price level do not change the quantity of ever get up and supply in the long run. Changes in aggregate price levels affect not only the price of inputs but the outputs as well.
What is potential output?
The level of real GDP economy would produce if all prices including wages were fully flexible.
Notated as Yp.
Describe the interaction of the LRAS curve and the SRAS curve.
The economy is always on a point along the SRAS but it gravitates towards the LRAS. This is because the LRAS is the economy’s potential output.
What is the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, government, the rest of the world?
Short run macroeconomic equilibrium
What is an event that shifts the aggregate demand curve call?
Demand shock
Demand shocks cause price level and output to . . .
Move in the same direction.
A supply shock moves the output and aggregate price levels. . .
Inversely. Ie. price levels fall but output increases
What characterizes long-run macroeconomic equilibrium?
Aggregate demand is equal to short run aggregate supply and long-run aggregate supply or potential output.
What is it called when aggregate output is below potential output?
A recessionary gap
What is it called when aggregate output is above potential output?
An inflationary gap
How is an output gap calculated?
Output gap = 100 x (actual aggregate output - Potential output)/Potential output
What is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions called?
Stabilization policy
