Chapter 9: Demand-Side Equilibrium- Unemployment or Inflation Flashcards
Equilibrium
refers to a situation in which neither consumes nor firms have any incentive to change their behavior; they are content to continue with things as they are
Total production and total income __________ ___ _______, but the same need not be true of total ______
must be equal; spending
When total spending _______ current production, neither output nor the price level is in equilibrium
exceeds
The equilibrium level of GDP on the demand side cannot be one at which total spending exceeds output because firms will notice that they are depleting their inventory stocks; firms may first decide to ______ production sufficiently to meet the higher demand. Later they may decide to _____ prices
increase ; raise
The equilibrium level of GDP on the demand side cannot be one at which total spending is less than output, because firms will not allow inventories to pile up; they may decide to _______ production, or they may decide to ____ prices in order to stimulate demand
decrease ; cut
The equilibrium level of GDP on the demand side is the level at which total spending ______ production; in such a situation, firms find their inventories remaining at desired levels, so they have no incentive to change output or prices
equals
Expenditure schedule
shows the relationship between national income (GDP) and total spending
45 degree line
displays all the points at which the economy can possibly be in demand-side equilibrium
- firms will be content with current output levels only if total spending equals production
income-expenditure diagram or 45 degree line diagram
plots total real expenditure against real income; the 45 degree angle marks off points where income and expenditure are equal
To the left of the equilibrium line, the expenditure line lies above the 45 degree line, what does this mean?
Total spending exceeds total output
- hence, inventories will be falling, and firms will conclude that they should increase production; thus production will rise toward the equilibrium point
To the right of the equilibrium line, the expenditure line lies below the 45 degree line, which means what?
spending falls short of output, inventories rise, and firms will cut back production, therefore moving closer to the equilibrium point
Whenever production is ABOVE the equilibrium level, market forces will drive output ______
down
Whenever production is BELOW the equilibrium level, market forces will drive output ______
up
Aggregate demand curve
shows the quantity of domestic product that is demanded at each possible value of the price level
REAL wealth ______ whenever the price level rises, which ______ their spending
declines; decreases
Higher prices _______ the demand for goods and services because they erode the purchasing power of consumer wealth
decrease
Lower prices _______ the demand for goods and services by enhancing the purchasing power of consumer wealth
increase
A higher price level leads to _____ real wealth and therefore to less spending at any given level of real income; thus a higher price level leads to a _____ consumption function (right) and a lower price level leads to a _____ consumption function (left)
lower; lower; higher
The consumption function displays the relationship between real consumer income and real consumer spending. Thus, if real income declines for any reason, the economy moves leftward along a fixed consumption function. By contrast, a decline in REAL WEALTH will shift the entire consumption function downward, which means
people spend less at any given level or real income
A rise in the price level will _______ ______ consumption function and total expenditure schedule
pull down
A fall in the price level will ______ consumption function and total expenditure schedule
rise
A rise in the price level, by shifting the expenditure schedule downward, leads to a ________ in the equilibrium quantity of real GDP demanded
reduction
A fall in the price level, by shifting the expenditure schedule upward, leads to a _____ in the equilibrium quantity of real GDP demanded
rise
Higher prices on consumer wealth is just one reason why the AD curve slopes __________
downward
Higher US prices (holding foreign prices constant) will _______ exports (X) and stimulate imports (IM). That means that higher US price levels will reduce the net exports component of total expenditure, therefore shifting the expenditure line __________ and __________ real GDP
depress; downward; lowering
When equilibrium GDP falls ______ potential GDP, the economy will be plagued by inflation, and when equilibrium falls ______ potential GDP, unemployment and recession will result
above; below
An equilibrium below potential GDP can arise when consumers or investors are unwilling to spend at normal rates, when government spending is low, when foreign demand is weak, or when the price level is too high. Any of these events would _______ the C+I+G+(X-IM) curve. Unemployment then occurs because not enough output is demanded to keep the entire labor force at work
depress
Recessionary gap
amount by which the equilibrium level of real GDP falls short of potential GDP
An equilibrium above potential GDP can arise when consumer or investment spending is usually buoyant, when foreign demand is particularly strong, when the government spends too much, or when a low price level pushes the expenditure curve _________
upward
Inflationary gap
amount b y which equilibrium real GDP exceeds the full-employment level of GDP
- the price level would have to rise enough to drive the expenditure schedule down until it passed through the 45 degree line
T/F Only if the price level and spending plans are “just right” will the expenditure curve intersect the 45 degree line precisely at full employment, so that neither a recessionary gap nor an inflationary gap occurs
True
Multiplier
the ratio of the change in equilibrium GDP (Y) divided by the original change in spending that causes the change in GDP
Multiplier=
change in Y / change in I
Y is the original change in spending that caused GDP to change
I is investment
Multiplier is always _______ than 1
greater
