Chapter 8 Flashcards
reasons why AD curve is downward sloping
- real balance effect
- interest rate effect
- international trade effect
what is the change in the purchasing power of dollar denominated assets?
real balance effect
what causes a movement along the AD curve?
a change in price level
suppose that consumption increases at each price level. as a result, AD ________, and the AD curve shifts ________
increases; rightward
A rise in foreign real national income tends to raise US _______, shifting the US AD curve to the _______
exports; right
a decrease in the price of electricity will cause….
a rightward shift in the SRAS curve
an increase in the price of oil will cause
a leftward shift in the SRAS curve
in the short run, a decrease in wage rates shifts the
SRAS curve to the right, causing equilibrium price level to fall and equilibrium real GDP to increase
what would cause a rightward shift in the AD curve?
an increase in government purchases of goods and services
the dollar appreciates in value. this makes foreign produced goods ______ for americans ans US produced goods ______ for foreigners. As a result ________ fall and US ________ rise.
cheaper, more expensive, exports, imports
foreign real income rises. This raises US _______, which ________ aggregate demand (AD). The AD curve shifts _________.
net exports, raises, rightward
What two factors change net exports?
- foreign national income (their income rises, they buy more US goods, the US net exports rise)
- Exchange rate (dollar appreciation/depreciation)
an adverse supply shock will shift the SRAS to the _____
left
what will definitely shift the aggregate demand?
business taxes decline and foreign real income rises
-wealth increases and individuals expect higher prices
velocity is the average number of times a dollar is spent to buy _______
final goods and services in a year
velocity and money supply are ______, then when one component of spending rises another component of spending _________
constant: must fall
what is AD?
the quantity demanded of all goods and services at different price levels
what is the buying side of the economy?
Aggregate demand`
wat is the producing side of the economy?
Aggregate supply
what is real balance effect?
states inverse relationship between price level and quantity demanded of GDP through monetary wealth
ex. how many units of something you could buy with $50
what is purchasing power?
quantity of goods and services that can be purchased with a unit of money (refers to real balance effect)
What is interest rate effect?
relationship between price level and quantity demanded through changes in part of house hold and business spending that is sensitive to interest rates
what is international trade effect?
change in foreign sector spending as the price level changes. (cheaper US goods, american and foreigners buy more US goods)
interest rate effect mainly refers to
price level changes
What 4 factors affect consumption
wealth, expectations of future prices/income, interest rate, income taxes
3 factors that change investment
interest rate, expectations about future sales, business taxes
Real wage=
nominal wage (30$ an hour) / price level
Quantity supplied of labor is directly related to ________
real wage, if real wage increases quantity of supplied labor increases
The quantity demanded of labor is __________ to the real wage
inversely
what shifts the SRAS curve?
wage rates
price of nonlabor
productivity
supply shocks
What three effects help move along the AD line?
- Purchasing power effect
- International trade effect
- Interest rate effect
What creates movement along the AS line?
- Sticky wages
2. Real wages= wage/CPI
What happens when price goes up?
Real wage goes down and creates inventories to increase production
