Chapter 8 Flashcards
What are the 2 changes that can occur during exogenous changes in the price level?
Changes in consumption
Changes in net exports
What happens when the price level rises? When the price level falls?
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
How do changes in the price level affect the wealth of bondholders and bond issuers? Does this affect aggregate wealth?
It changes the wealth of bondholders and bond issuers, but these changes offset each other so there is no change in aggregate wealth
In summary, what does a rise in the price level lead to?
It leads to a reduction in the real value of the private sector’s wealth
What does a reduction in wealth lead to? How does it affect the AE function?
It leads to a decrease in autonomous desired consumption and to a downward shift in the AE function
What does a fall in the price level lead to? How does it affect the AE function?
It leads to a rise in wealth and desired consumption and to an upward shift in the AE function
What happens to Canadian goods when domestic price levels rise (and the exchange rate remains unchanged)?
Canadian goods become more expensive relative to foreign goods
What do Canadian consumers do when domestic price levels rise?
They reduce their purchases of Canadian-made goods and increase their purchases of foreign goods
What do foreign consumers do when domestic price levels rise in Canada?
They reduce their purchases of Canadian-made goods
What does a rise in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?
It shifts the net export function and AE curve downward
What does a fall in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?
It shifts the net export function and AE function upward
What does the aggregate demand curve (AD) curve show?
It shows the combinations of real GDP and the price level that make desired aggregate expenditure equal to actual national income
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 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.
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 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.
What does desired aggregate expenditure equal to?
It equals to actual national income
What is the equation for aggregate demand?
AD = C+I+(X-IM)
AD rises if…
C ___
I ___
G ___
X ___
IM ___
rises
rises
rises
rises
falls
What are shifts/shocks?
They are changes that occur that are not caused by changes in price level
What do we call the situation where the AE and AD curves shift due to the same change?
An AD shock
What happens to the AE and AD curves when an increase in autonomous aggregate expenditure causes an aggregate demand shock?
It shifts the AE curve upward and the AD curve to the right
What happens to the AE and AD curves when a fall in autonomous aggregate expenditure causes an aggregate demand shock?
It shifts the AE curve downward and the AD curve to the left
What does the simple multiplier measure in the AD curve in response to a change in autonomous desired expenditure?
It measures the horizontal shift in the AD curve
What is the equation for the horizontal shift of the AD curve?
Horizontal shift of the AD curve = simple multiplier x the increase in autonomous expenditure (ΔA)
What is the aggregate supply (AS) curve?
It is a curve showing the relation between the price level and the quantity of aggregate output supplied, for given technology and factors
What methods of production could have been used when output increases?
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
Why does unit cost, or cost per unit of output, increase?
Because of what the aggregate supply curve shows and because of how the aggregate supply curve reacts when output increases/decreases
Is the AS curve positively or negatively sloped?
It is positively sloped
The higher the level of output, the ____ unit costs tend to rise, so the AS curve becomes ____ as output rises
faster
steeper
What are shifts in the AS curve that are caused by exogenous forces called?
They are called aggregate supply shocks
Where does the AS curve shift when factor prices rise?
to the left
Where does the AS curve shift when factor prices fall?
to the right
Where does the AS curve shift when an improvement in technology occurs?
to the right
Where does the AS curve shift when a deterioration in technology occurs?
to the left
Where is demand behaviour consistent with supply behaviour?
Only at the intersection of the AS and AD curves
What do positive shocks do to equilibrium GDP? What do negative shocks do to equilibrium GDP?
Increase
Reduce
What do aggregate demand shocks do to price level and real GDP?
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
Where does an increase in autonomous expenditure cause the AE curve to shift?
To shift upward
Where does a rise in the price level cause the AE curve to shift?
To shift part of the way down
What happens to the price level and real GDP when there are changes in equilibrium?
They both move in the same direction
What happens to the price level and real GDP when AD increases?
Price level and real GDP increase
What happens to the price level and real GDP when AD decreases?
Price level and real GDP fall
What happens to price level when the multiplier is smaller?
The price level becomes non-constant
What kind of multiplier does an upward sloping AS curve have?
smaller multiplier which is smaller than the simple multiplier
What does a steeper AS curve have?
A greater price effect and a smaller output effect
How are the effects divided when the AD curve shifts to the right?
The effects are divided between changes in real output and changes in price level
What happens to the price level and real GDP when AS shocks occur?
They change in opposite directions
Where does a negative supply shock cause the AS to shift?
To the left
Where does a rise in price level cause the AE to curve?
to curve downward
