Chp26 - Aggregate Supply and Aggregate Demand

Question 1

Quantity of Real GDP Supplied

Answer 1

• total quantity of goods and services, valued in constant base-year dollars, that firms plan to produce in a given period
• at full employment, Quantity of RGDP Supplied equals potential GDP

Question 2

Aggregate Supply

Answer 2

• relationship between the quantity of RGDP supplied and the price level
• increase in potential GDP increases both long-run aggregate supply and short-run aggregate supply
• Increases in potential GDP
  
  • increase in full-employment quantity of labour
  • increase in quantity of capital
  • advance in tech.

Question 3

Long Run Aggregate Supply

Answer 3

• the relationship between the quantity of RGDP and the price level when the money wage rate changes in step with the price level to maintain full employment
• always located at potential GDP
• vertical curve because potential GDP is independent of price level

Question 4

Short-Run Aggregate Supply

Answer 4

• relationship between the quantity of real GDP supplied and the price level when the money wage rate, prices of other resources and potential GDP remain constant
• a rise in price level brings an increase in the quantity of real GDP supplied
• slopes upward

Question 5

Money Wage Rate

Answer 5

• rise in money wage rate shifts SAS leftward decreasing it
• does not change the LAS curve because a change in money wage rate does not alter the price level

Why does it change?

• departure from full employment
• expectations about inflation

Question 6

Quantity of Real GDP Demanded

Answer 6

• the total amount of final goods and services produced in Canada that people, businesses, governments, foreigners plan to buy
• depends on: price level, expectations, fiscal/monetary policy, the world economy

Question 7

Aggregate Demand

Answer 7

• the relationship between the quantity of real GDP demanded and the price level
• higher the price level, the smaller the quantity of real GDP
• slopes downward due to wealth effect and substitution effect

Question 8

Wealth Effect

Answer 8

• when the price level rises, real wealth decreases

- prices rises causes people to save more and thus decrease aggregate demand

Question 9

Substitution Effect

Answer 9

• when price level rises, interest rates rise
• rising prices decrease the real value of money people have saved; with a ‘smaller’ amount of money, banks can get a higher interest rate on loans
• when Canadian interest rates rise, Canadian goods becomes more expensive relative to foreign goods

Question 10

Changes in Aggregate Demand

Answer 10

• due to: expectations, fiscal/monetary policy, world economy

Question 11

Short-run Macroeconomic equilibrium

Answer 11

• occurs when quantity of real GDP supplied and demanded are equal
• Money-wage is fixed

Question 12

Long-run Macroeconomic equilibrium

Answer 12

• when real GDP equals potential GDP (when LAS intersects AD)