Chapter 3 AD/AS Graph Flashcards
Aggregate Demand
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
Why does the AD curve slope downward?
Wealth Effect
Interest Rate Effect
Foreign Purchases Effect
Wealth Effect
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
Interest Rate Effect
As interest rates increase, spending decreases
As they decrease, spending increases
Foreign Purchases Effect
As price levels increase, the demand for US exports decreases
As price levels decrease, the demand for US exports increases
How does the AD curve slope?
Downward (inverse relationship)
Determinant
Shifter, what causes curves to shift or move left or right
Consumer spending as a determinant
- Consumer wealth
- Consumer expectations
- Household debt
- Taxes
As consumer wealth increases; as it decreases
AD increases; AD decreases
When will consumers increase AD
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
If consumers expect a decrease in their future income,
They will decrease current AD
If consumers increase their debt,
AD will increase (think credit cards)
If consumers decrease their debt,
AD will decrease
What is future income
A bonus or a raise
How will AD increase through taxes?
If the government decreases personal taxes
Investment spending (business)
1) Interest rates
2) expected return on investment
3) business taxes
4) degree of excess capacity
If interest rates increase,
Businesses and consumers will borrow less money, causing AD to decrease
What happens if interest rates decrease?
Businesses and consumers will borrow more money causing AD to increase (Ig)
Expected return on investment affects AD. How?
If businesses expect returns on investments to increase, AD will increase
If businesses expect returns on investments to decrease, AD will decrease
If business taxes increase
AD will decrease (Ig)
If there is an increase in excess capacity; if there is a decrease in excess capacity
AD will decrease
AD will increase
What is excess capacity?
Machines and factories sitting idle
How does government spending affect AD?
An increase in gov. spending will increase AD and vice versa
Net Exports affects AD. How?
Incomes Abroad and Exchange Rates
What happens if incomes around the world increase?
AD will increase
Exchange rates affects AD. How?
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
Aggregate Supply
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
What are the AS models?
The classical model based on Adam Smith’s work
The Keynesian Model based on John Maynard Keynes’s work
Who is Adam Smith?
The Father of Economics
Who is John Maynard Keynes?
The Father of Modern Economic Thought
What are the determinants of AS?
1) Input prices
2) Productivity
3) Legal-institutional Environment
What input prices affect AS?
1) Land
2) Labor
3) Capital
4) Prices of Imported Resources
5) Market Powers
What are input prices?
What goes into making products
How does land affect AS?
An increase in land resources decreases the cost of land inputs which will increase AS
And vice versa
How does Labor affect AS?
An increase in the availability of labor resources decreases the cost of labor inputs which will increase AS
And vice versa
How does Capital affect AS?
An increase in the stock of capital will increase AS, whereas a decrease in the stock of capital will decrease AS
