Chapter 8 Flashcards
What Does the AE Curve Show?
The AE curve shows desired aggregate expenditure for each level of GDP at a particular price level. Its intersection with the 45° line determines equilibrium GDP for that price level.
Example sentence: The AE curve helps in understanding the relationship between desired expenditure and GDP.
How Does a Change in the Price Level Affect Aggregate Expenditure?
A change in the price level affects aggregate expenditure by changing wealth, which affects desired consumption, and by changing international relative prices, which affects desired net exports.
Additional information: Changes in the price level can have significant impacts on consumer behavior and trade.
What Happens When the Price Level Rises or Falls?
A rise in the price level shifts the AE curve down and reduces equilibrium GDP, while a fall in the price level shifts the AE curve up and increases equilibrium GDP.
No additional information.
What Does the AD Curve Plot?
The AD curve plots the equilibrium level of GDP that corresponds to each possible price level. A change in equilibrium GDP following a change in the price level is shown by a movement along the AD curve.
No additional information.
When Does the AD Curve Shift Horizontally?
The AD curve shifts horizontally when any element of autonomous expenditure changes. The simple multiplier measures the size of the shift.
No additional information.
What Assumptions are Made When Drawing the AS Curve?
Any AS curve is drawn for given factor prices and a given state of technology.
No additional information.
Why is the AS Curve Usually Upward-Sloping?
The AS curve is usually upward-sloping because firms’ unit costs tend to rise when their output rises.
No additional information.
What Happens to the AS Curve at Low Levels of Output?
At low levels of output, firms’ excess capacity may result in a horizontal AS curve.
No additional information.
What Causes the AS Curve to Shift Right?
An improvement in technology or a decrease in factor prices shifts the AS curve to the right, indicating an increase in aggregate supply.
No additional information.
What Causes the AS Curve to Shift Left?
A deterioration in technology or an increase in factor prices shifts the AS curve to the left, indicating a decrease in aggregate supply.
No additional information.
What is Macroeconomic Equilibrium?
Macroeconomic equilibrium refers to the equilibrium values of real GDP and the price level, determined by the intersection of the AD and AS curves.
No additional information.
What are Aggregate Demand and Aggregate Supply Shocks?
Shifts in the AD and AS curves, called aggregate demand and aggregate supply shocks, change the equilibrium values of real GDP and the price level.
No additional information.
How Does an Aggregate Demand Shock Affect the Economy?
When the AS curve is positively sloped, an aggregate demand shock causes the price level and real GDP to move in the same direction. When the AS curve is flat, shifts in the AD curve primarily affect real GDP, and when the AS curve is steep, shifts in the AD curve primarily affect the price level.
No additional information.
How Does an Aggregate Supply Shock Affect the Economy?
An aggregate supply shock moves equilibrium GDP along the AD curve, causing the price level and real GDP to move in opposite directions.
No additional information.
What Happens During Combined Aggregate Supply and Demand Shocks?
Some events, like changes in the world prices of raw materials, can cause both aggregate supply and demand shocks. The overall effect depends on the relative sizes of the separate effects.
No additional information.
