Chapter 8A | Aggregate Supply and Aggregate Demand

Question 1

Review of Comparative Statics for Microeconomics

Answer 1

Price and Quantity changes are the result, not the cause, of economic events

Thinking like an economists means analyzing a situation
using comparative statics

Start with one equilibrium situation (intersection of supply and demand, other things the same) in terms of price and quantity

Question 2

Economic models assume

Answer 2

all other things not in the model do not change

Mental equivalent of controlled experiments in laboratory

Question 3

An economic model is simplified

Answer 3

representation of the real world, focusing attention on what’s important for understanding

Question 4

Model of aggregate supply & aggregate demand explains

Answer 4

When the economy hits targets of potential GDP, full employment, stable prices
When the economy misses targets, resulting in business cycles, unemployment, inflation

Caused by shifts of aggregate supply & aggregate demand
Supply shocks and demand shocks

Differences between Yes and No camps on origins of shocks and how economy responds after a shock

Question 5

Comparative Statics for Macroeconomics

Answer 5

Changes in real GDP, unemployment, and inflation are the result, not the cause, of economic events

Start with one equilibrium situation (intersection of aggregate supply and aggregate demand, other things remain the same)
- Change one other thing/variable
- Compare resulting equilibrium situation (intersection of aggregate supply and aggregate demand after change)

Question 6

Long-Run Aggregate Supply

Answer 6

models the macroeconomic target outcomes of potential GDP and full employment with existing inputs

Question 7

(LRAS) Potential GDP (full-employment output) is modeled as

Answer 7

Points on production possibilities frontier (PPF)

Long run aggregate supply - quantity real GDP supplied when all inputs fully employed

Long-run aggregate supply curve (LAS) – vertical line at potential GDP; potential GDP does not change when price level changes

Question 8

(LRAS) Existing inputs are unused or unemployed at

Answer 8

Points inside PPF

Question 9

(LRAS) Time periods for macroeconomic analysis are

Answer 9

Long run - a period of time long enough for all prices and wages to adjust to equilibrium; economy at potential GDP, the full employment outcome of coordinated smart choices

Short run - a period of time when some input prices do not change; not all prices have adjusted to clear all markets

Question 10

(LRAS) Input vs Output Market Differences

Answer 10

Difference based on real world observations that prices adjust more slowly in input (labour) markets than in output markets

Question 11

(LRAS) Difference between macroeconomic long run and short run Involves a disconnect between input markets and output markets

Answer 11

In short run, prices fixed in input markets, but flexible in output markets

In long run, prices flexible in both

Question 12

Long run and short run not defined in calendar time, but

Answer 12

defined if all prices have adjusted to equilibrium (long-run) or not (short-run)

Question 13

Short-Run Aggregate Supply

Answer 13

Supply plans for existing inputs determine aggregate quantity supplied. Supply plans to increase the quantity and quality of inputs, together with supply shocks, change aggregate supply.

Question 14

Macroeconomic players (SRAS)

Answer 14

Consumers
Businesses
Government

Question 15

Make two kinds of plans for supplying real GDP (SRAS)

Answer 15

Supply plans for existing inputs
Supply plans to increase inputs

Question 16

Focus on business supply plans as most important
(SRAS)

Answer 16

Production takes time, so business supply plans are based on expectation of what demand will be when products come to market

Question 17

Business supply plans for existing inputs with fixed input prices are like microeconomic choices about quantity supplied (SRAS)

Answer 17

Short-run aggregate supply - quantity of real GDP macroeconomic players plan to supply at different price levels

Law of short-run aggregate supply - as price level rises, aggregate quantity supplied of real GDP increases

Changes in price level cause movement along an unchanged short-run aggregate supply curve (SAS)