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ECO105 MACRO > chapter 8 > Flashcards

chapter 8 Flashcards

1
Q

The macro PPF shows

A

the maximum combinations of consumer goods and capital goods that the economy can produce

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1
Q
A
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2
Q

Points inside the PPF represent

A

unemployed inputs (AKA workers without jobs, factories not operating, farmland not producing crops, etc.)

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3
Q

Long-Run Aggregate Supply

A

potential GDP; the quantity of real GDP supplied when all inputs are fully employed

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4
Q

Quantity of real GDP in LRAS Curve

A

No matter what the price level is at potential GDP, the quantity of real GDP does not change

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5
Q

All quantities of real GDP less than potential GDP in the LRAS curve represent

A

unemployed inputs, including unemployed workers

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6
Q

Long run period of time

A

time long enough for all prices and wages to adjust so that Adam Smith’s invisible hand works well

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7
Q

Short run period of time

A

where some input prices do not change → they have not adjusted to clear all markets and some choices are not coordinated

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8
Q

definition

Short-Run Aggregate Supply

A

Quantity of real GDP macroeconomic players plan to supply at different price levels

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9
Q

The SRAS curve is ____ sloping because input prices are fixed in the short-run

A

upward

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10
Q

The intersection of LRAS and SRAS curves means

A

that short-run supply plans hit the target of potential GDP

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11
Q

Law of Short-Run Aggregate Supply

A
  • as the price level rises, aggregate quantity supplied of real GDP increases
  • With fixed input prices, higher output prices create incentives for increased production through higher profits and by covering higher marginal opportunity costs of production
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12
Q

supply plans

A

to increase inputs

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13
Q

Increase in aggregate supply

A

increase in economy’s capacity to produce real GDP caused by increases in quantity/quality of inputs

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14
Q

An increase in inputs shifts

A

both LRAS and SRAS rightward

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15
Q

A decrease in inputs shifts

A

both LRAS and SRAS leftward

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16
Q

A change in aggregate quantity supplied is caused by

A

a change in the price level, which is a movement along an unchanged short-run aggregate supply curve

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17
Q

A change in aggregate supply is caused by

A

changes in the quality or quantity of inputs, which is a shift of both the LRAS and SRAS curves

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18
Q

Changing input prices shift

A

the SRAS curve but do not shift LRAS
* Rising input prices shift SRAS leftward
* Falling input prices shift SRAS rightward

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19
Q
A
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20
Q

what do they do

Negative supply shocks

A

decrease short-run aggregate supply

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21
Q

what do positive supply shocks do?

A

increase short-run aggregate supply

22
Q

Aggregate Demand

A

quantity of real GDP macroeconomic players plan to demand at different price levels

23
Q

Law of Aggregate Demand

A

as the price level rises, aggregate quantity demanded of real GDP decreases

24
Q

the law of aggregate demand is an example of

A

the fallacy of composition

25
Q

When average prices of all Canadian products and services rise

A

imported products and services produced in other countries become cheaper for Canadian consumers

26
Q

As the prices of Canadian exports rise

A

the rest of the world buys less of them, switching to cheaper substitutes from other countries

27
Q

What happens to AQD when Canadians buy more imports and R.O.W buys fewer Canadian exports

A

aggregate quantity demanded of Canadian products and services decreases

28
Q

the largest part of aggregate demand

A

Consumer spending

29
Q

Most unpredictable part of AD

A

business investment spending

30
Q

business investment spending, LRAS and SRAS

A

New inputs increase LRAS and SRAS, but because the machinery that businesses buy are outputs produced by other businesses, the purchases are also part of aggregate demand

31
Q

Government and AD

A

Government transfer payments go to consumers and show up in aggregate demand as part of planned consumer spending from that transfer payment income, so transfer payments are not part of government spending

32
Q

R.O.W (exports)

A

Canadian exports are products and services produced here but sold to the rest of the world

33
Q

Imports and AD

A
  • DO NOT contribute to Canadian planned aggregate demand or real GDP
  • Imports are included in the planned spending categories of consumption, investment, and government purchases of products and services
34
Q

Demand shocks

A

changes in factors other than the price level that change aggregate demand and shift the aggregate demand curve

35
Q

Negative demand shocks and AD

A

decrease aggregate demand and shift AD leftward

36
Q

Positive demand shocks and AD

A

increase aggregate demand and shift AD rightward

37
Q

Factors that Shift Aggregate Demand

A
  1. Expectations
  2. Interest Rates
  3. Government Policy
  4. GDP in ROW
  5. Exchange rates
38
Q

Expectations: Investment and consumer spending

A

Future:
* Pessimistic expectations about future economic conditions are a negative demand shock
* Optimistic expectations are a positive demand shock since investment spending increases and so does aggregate demand

Consumer spending:
* When consumers become more pessimistic about their economic future, they may decrease spending and increase savings
* When consumers become more optimistic about their economic future, they increase spending and decrease savings

39
Q

Interest Rates

A
  • Rising interest rates are a negative demand shock, as borrowing to finance investment projects becomes more expensive and fewer investment projects are profitable
  • Falling interest rates are a positive demand shock, as borrowing becomes cheaper and more investment projects become profitable, leading to an increase in aggregate demand
40
Q

effect onAggregate Demand

Government Policy

A
  • Higher taxes are a negative demand shock as consumers and businesses have less money to spend, decreasing aggregate demand
  • Tax cuts and more government spending are positive demand shocks, increasing aggregate demand
41
Q

GDP in R.O.W

A
  • Decreases in GDP in ROW are a negative demand shock, decreasing the demand for Canadian exports and decreasing Canadian aggregate demand
  • Increases in GDP in ROW are a positive demand shock
42
Q

Exchange rates

A
  • A rise in the exchange rate is a negative demand shock, decreasing exports and increasing imports, decreasing Canadian aggregate demand
  • A fall in the exchange rate is a positive demand shock, increasing exports and decreasing imports, increasing Canadian aggregate demand
43
Q

Macroeconomic Equilibrium

A

Aggregate demand matching aggregate supply

44
Q

Short-run aggregate equilibrium

A

the point where short-run aggregate supply (SRAS) and aggregate demand (AD) intersect

45
Q

Long-run equilibrium

A

the point where SRAS, AD and LRAS all intersect

46
Q

Market for loanable funds

A

banks coordinate the supply of loanable funds (savings) with the demand for loanable funds (borrowing for investment spending). The interest rate is the price of loanable funds

47
Q

negative demand shocks cause

A

a recessionary gap: falling average prices, decreased real GDP and increased unemployment

48
Q

Positive demand shocks cause

A

an inflationary gap: rising average prices, increased real GDP, and decreased unemployment

49
Q

negative supply shocks cause

A

stagflation: rising average prices, decreased real GDP and increased unemployment

50
Q

Positive supply shocks cause

A

falling average prices, increased real GDP and continued full employment

51
Q

Origin of Shocks and Business Cycles: Yes, markets self-adjust, so hands-off

A
  • Shocks to aggregate supply and aggregate demand that trigger business cycles largely come from outside the economy
  • Mistaken government fiscal and monetary policies are viewed as demand shocks that can cause a recession
  • Government does not intend to cause economic problems, but it is difficult to time policy decisions and unintentional policy mistakes can cause business cycles → government is part of the problem not part of the solution
  • Individuals are rational and make logical decisions
  • Price adjustments in markets work to quickly restore long-run macroeconomic equilibrium
  • Government should back off
52
Q

Origin of Shocks and Business Cycles: No, markets fail often, so hands-on

A
  • Shocks to SRAS and aggregate demand are internally generated as unintended byproducts of markets
  • Investment plans are based on expectations and decisions are based largely on a gut-level instinct to act
  • relying on other investors and the nature of investments all combine to make expectations and investment spending decisions very volatile
  • When uncertain about the future, money is put into savings
  • only government can fix these things

ECO105 MACRO (9 decks)

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