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AP macroeconomics > Chapter 3 AD/AS Graph > Flashcards

Chapter 3 AD/AS Graph Flashcards

1
Q

Aggregate Demand

A

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

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2
Q

Why does the AD curve slope downward?

A

Wealth Effect
Interest Rate Effect
Foreign Purchases Effect

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3
Q

Wealth Effect

A

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

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4
Q

Interest Rate Effect

A

As interest rates increase, spending decreases

As they decrease, spending increases

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5
Q

Foreign Purchases Effect

A

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

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6
Q

How does the AD curve slope?

A

Downward (inverse relationship)

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7
Q

Determinant

A

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

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8
Q

Consumer spending as a determinant

A
  1. Consumer wealth
  2. Consumer expectations
  3. Household debt
  4. Taxes
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9
Q

As consumer wealth increases; as it decreases

A

AD increases; AD decreases

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10
Q

When will consumers increase AD

A

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

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11
Q

If consumers expect a decrease in their future income,

A

They will decrease current AD

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12
Q

If consumers increase their debt,

A

AD will increase (think credit cards)

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13
Q

If consumers decrease their debt,

A

AD will decrease

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14
Q

What is future income

A

A bonus or a raise

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15
Q

How will AD increase through taxes?

A

If the government decreases personal taxes

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16
Q

Investment spending (business)

A

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

17
Q

If interest rates increase,

A

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

18
Q

What happens if interest rates decrease?

A

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

19
Q

Expected return on investment affects AD. How?

A

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

20
Q

If business taxes increase

A

AD will decrease (Ig)

21
Q

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

A

AD will decrease

AD will increase

22
Q

What is excess capacity?

A

Machines and factories sitting idle

23
Q

How does government spending affect AD?

A

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

24
Q

Net Exports affects AD. How?

A

Incomes Abroad and Exchange Rates

25
Q

What happens if incomes around the world increase?

A

AD will increase

26
Q

Exchange rates affects AD. How?

A

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

27
Q

Aggregate Supply

A

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

28
Q

What are the AS models?

A

The classical model based on Adam Smith’s work

The Keynesian Model based on John Maynard Keynes’s work

29
Q

Who is Adam Smith?

A

The Father of Economics

30
Q

Who is John Maynard Keynes?

A

The Father of Modern Economic Thought

31
Q

What are the determinants of AS?

A

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

32
Q

What input prices affect AS?

A

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

33
Q

What are input prices?

A

What goes into making products

34
Q

How does land affect AS?

A

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

35
Q

How does Labor affect AS?

A

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

36
Q

How does Capital affect AS?

A

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

AP macroeconomics (1 decks)

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