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Macroeconomics > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What are the 2 changes that can occur during exogenous changes in the price level?

A

Changes in consumption
Changes in net exports

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2
Q

What happens when the price level rises? When the price level falls?

A

A rise in the price level lowers the real value of money held by the private sector
A fall in the price level raises the real value of money held by the private sector

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3
Q

How do changes in the price level affect the wealth of bondholders and bond issuers? Does this affect aggregate wealth?

A

It changes the wealth of bondholders and bond issuers, but these changes offset each other so there is no change in aggregate wealth

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4
Q

In summary, what does a rise in the price level lead to?

A

It leads to a reduction in the real value of the private sector’s wealth

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5
Q

What does a reduction in wealth lead to? How does it affect the AE function?

A

It leads to a decrease in autonomous desired consumption and to a downward shift in the AE function

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6
Q

What does a fall in the price level lead to? How does it affect the AE function?

A

It leads to a rise in wealth and desired consumption and to an upward shift in the AE function

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7
Q

What happens to Canadian goods when domestic price levels rise (and the exchange rate remains unchanged)?

A

Canadian goods become more expensive relative to foreign goods

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8
Q

What do Canadian consumers do when domestic price levels rise?

A

They reduce their purchases of Canadian-made goods and increase their purchases of foreign goods

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9
Q

What do foreign consumers do when domestic price levels rise in Canada?

A

They reduce their purchases of Canadian-made goods

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10
Q

What does a rise in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?

A

It shifts the net export function and AE curve downward

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11
Q

What does a fall in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?

A

It shifts the net export function and AE function upward

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12
Q

What does the aggregate demand curve (AD) curve show?

A

It shows the combinations of real GDP and the price level that make desired aggregate expenditure equal to actual national income

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13
Q

What does a rise in the price level do to the AE curve which also causes what kind of movement on the AD curve?

A

A rise in the price level causes the AE curve to shift downward and leads to a movement upward and to the left along the AD curve, reflecting a fall in the equilibrium level of GDP.

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14
Q

What does a fall in the price level do to the AE curve which also causes what kind of movement on the AD curve?

A

A fall in the price level causes the AE curve to shift upward and leads to a movement downward and to the right along the AD curve, reflecting a rise in the equilibrium level of GDP.

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15
Q

What does desired aggregate expenditure equal to?

A

It equals to actual national income

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16
Q

What is the equation for aggregate demand?

A

AD = C+I+(X-IM)

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17
Q

AD rises if…
C ___
I ___
G ___
X ___
IM ___

A

rises
rises
rises
rises
falls

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18
Q

What are shifts/shocks?

A

They are changes that occur that are not caused by changes in price level

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19
Q

What do we call the situation where the AE and AD curves shift due to the same change?

A

An AD shock

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20
Q

What happens to the AE and AD curves when an increase in autonomous aggregate expenditure causes an aggregate demand shock?

A

It shifts the AE curve upward and the AD curve to the right

21
Q

What happens to the AE and AD curves when a fall in autonomous aggregate expenditure causes an aggregate demand shock?

A

It shifts the AE curve downward and the AD curve to the left

22
Q

What does the simple multiplier measure in the AD curve in response to a change in autonomous desired expenditure?

A

It measures the horizontal shift in the AD curve

23
Q

What is the equation for the horizontal shift of the AD curve?

A

Horizontal shift of the AD curve = simple multiplier x the increase in autonomous expenditure (ΔA)

24
Q

What is the aggregate supply (AS) curve?

A

It is a curve showing the relation between the price level and the quantity of aggregate output supplied, for given technology and factors

25
Q

What methods of production could have been used when output increases?

A

Less efficient standby plants may have to be used
Less efficient workers may have been hired
Existing workers may have to be paid overtime rates for additional work

26
Q

Why does unit cost, or cost per unit of output, increase?

A

Because of what the aggregate supply curve shows and because of how the aggregate supply curve reacts when output increases/decreases

27
Q

Is the AS curve positively or negatively sloped?

A

It is positively sloped

28
Q

The higher the level of output, the ____ unit costs tend to rise, so the AS curve becomes ____ as output rises

A

faster
steeper

29
Q

What are shifts in the AS curve that are caused by exogenous forces called?

A

They are called aggregate supply shocks

30
Q

Where does the AS curve shift when factor prices rise?

A

to the left

31
Q

Where does the AS curve shift when factor prices fall?

A

to the right

32
Q

Where does the AS curve shift when an improvement in technology occurs?

A

to the right

33
Q

Where does the AS curve shift when a deterioration in technology occurs?

A

to the left

34
Q

Where is demand behaviour consistent with supply behaviour?

A

Only at the intersection of the AS and AD curves

35
Q

What do positive shocks do to equilibrium GDP? What do negative shocks do to equilibrium GDP?

A

Increase
Reduce

36
Q

What do aggregate demand shocks do to price level and real GDP?

A

It causes the price level and real GDP to change in the same direction. Both rise with an increase in aggregate demand, and both fall with a decrease in aggregate demand

37
Q

Where does an increase in autonomous expenditure cause the AE curve to shift?

A

To shift upward

38
Q

Where does a rise in the price level cause the AE curve to shift?

A

To shift part of the way down

39
Q

What happens to the price level and real GDP when there are changes in equilibrium?

A

They both move in the same direction

40
Q

What happens to the price level and real GDP when AD increases?

A

Price level and real GDP increase

41
Q

What happens to the price level and real GDP when AD decreases?

A

Price level and real GDP fall

42
Q

What happens to price level when the multiplier is smaller?

A

The price level becomes non-constant

43
Q

What kind of multiplier does an upward sloping AS curve have?

A

smaller multiplier which is smaller than the simple multiplier

44
Q

What does a steeper AS curve have?

A

A greater price effect and a smaller output effect

45
Q

How are the effects divided when the AD curve shifts to the right?

A

The effects are divided between changes in real output and changes in price level

46
Q

What happens to the price level and real GDP when AS shocks occur?

A

They change in opposite directions

47
Q

Where does a negative supply shock cause the AS to shift?

A

To the left

48
Q

Where does a rise in price level cause the AE to curve?

A

to curve downward

Macroeconomics (14 decks)

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