Chapter 3 AD/AS Graph

Question 1

Aggregate Demand

Answer 1

The major cause for fluctuation in the Business Cycle
A schedule or curve showing the various amounts of goods and services (real output) that consumers, businesses, government, and foreign buyers desire to purchase at various price levels

Question 2

Why does the AD curve slope downward?

Answer 2

Wealth Effect
Interest Rate Effect
Foreign Purchases Effect

Question 3

Wealth Effect

Answer 3

Higher price levels reduce the purchasing power of the public’s assets, reducing purchases
Lower price levels increase the purchasing power of the public’s assets, increasing purchases

Question 4

Interest Rate Effect

Answer 4

As interest rates increase, spending decreases

As they decrease, spending increases

Question 5

Foreign Purchases Effect

Answer 5

As price levels increase, the demand for US exports decreases
As price levels decrease, the demand for US exports increases

Question 6

How does the AD curve slope?

Answer 6

Downward (inverse relationship)

Question 7

Determinant

Answer 7

Shifter, what causes curves to shift or move left or right

Question 8

Consumer spending as a determinant

Answer 8

1. Consumer wealth
2. Consumer expectations
3. Household debt
4. Taxes

Question 9

As consumer wealth increases; as it decreases

Answer 9

AD increases; AD decreases

Question 10

When will consumers increase AD

Answer 10

When their wealth increases
or they expect an increase in future income (such as a bonus or raise)
or they increase their debt
or the government decreases taxes

Question 11

If consumers expect a decrease in their future income,

Answer 11

They will decrease current AD

Question 12

If consumers increase their debt,

Answer 12

AD will increase (think credit cards)

Question 13

If consumers decrease their debt,

Answer 13

AD will decrease

Question 14

What is future income

Answer 14

A bonus or a raise

Question 15

How will AD increase through taxes?

Answer 15

If the government decreases personal taxes

Question 16

Investment spending (business)

Answer 16

1) Interest rates
2) expected return on investment
3) business taxes
4) degree of excess capacity

Question 17

If interest rates increase,

Answer 17

Businesses and consumers will borrow less money, causing AD to decrease

Question 18

What happens if interest rates decrease?

Answer 18

Businesses and consumers will borrow more money causing AD to increase (Ig)

Question 19

Expected return on investment affects AD. How?

Answer 19

If businesses expect returns on investments to increase, AD will increase
If businesses expect returns on investments to decrease, AD will decrease

Question 20

If business taxes increase

Answer 20

AD will decrease (Ig)

Question 21

If there is an increase in excess capacity; if there is a decrease in excess capacity

Answer 21

AD will decrease

AD will increase

Question 22

What is excess capacity?

Answer 22

Machines and factories sitting idle

Question 23

How does government spending affect AD?

Answer 23

An increase in gov. spending will increase AD and vice versa

Question 24

Net Exports affects AD. How?

Answer 24

Incomes Abroad and Exchange Rates

Question 25

What happens if incomes around the world increase?

Answer 25

AD will increase

Question 26

Exchange rates affects AD. How?

Answer 26

If the dollar depreciates, or is worth less versus other currencies), exports will increase causing AD to increase

If the dollar appreciates, or is worth more versus other currencies, exports will decrease, causing AD to decrease

Question 27

Aggregate Supply

Answer 27

A schedule or curve showing the level of real output which will be produced at various price levels
From a producer’s point of view

Question 28

What are the AS models?

Answer 28

The classical model based on Adam Smith’s work

The Keynesian Model based on John Maynard Keynes’s work

Question 29

Who is Adam Smith?

Answer 29

The Father of Economics

Question 30

Who is John Maynard Keynes?

Answer 30

The Father of Modern Economic Thought

Question 31

What are the determinants of AS?

Answer 31

1) Input prices
2) Productivity
3) Legal-institutional Environment

Question 32

What input prices affect AS?

Answer 32

1) Land
2) Labor
3) Capital
4) Prices of Imported Resources
5) Market Powers

Question 33

What are input prices?

Answer 33

What goes into making products

Question 34

How does land affect AS?

Answer 34

An increase in land resources decreases the cost of land inputs which will increase AS
And vice versa

Question 35

How does Labor affect AS?

Answer 35

An increase in the availability of labor resources decreases the cost of labor inputs which will increase AS
And vice versa

Question 36

How does Capital affect AS?

Answer 36

An increase in the stock of capital will increase AS, whereas a decrease in the stock of capital will decrease AS