Econ Test 3 - Aggregate Demand and Supply Analysis Flashcards
Aggregate demand is made up of how many components?
four
The total quantity of an economy’s output of final goods and services demanded
Aggregate Demand
What are the four components that make up aggregate demand?
consumption spending
investment spending
Government spending
Net exports
Yad =
C + I + G + NX
What is consumer spending on goods and services?
consumption
What is business spending on machines, factories, other capital goods, plus spending on new home construction?
Investment spending
What is federal, state, and local government spending on labor and all other goods and services and consumables?
Government spending
What is foreign spending on domestically produced goods and services?
Net exports
What is the net of domestic spending on foreign produced goods and services?
Net Exports
What is the relationship between the quantity of aggregate output demanded and the inflation rate when all other variables are held constant?
Aggregate Demand Curve
What makes up the aggregate demand curve?
output demanded
inflation rate
What is a positive function of disposable income?
Consumption spending
Consumption spending is a positive function of what?
disposable income
What is a negative function of the real interest rate?
Investment spending
Investment spending is a negative function of what?
real interest rate
The relationship between aggregate demand and inflation is based on the recognition that?
rising inflation will elicit a real interest rate response from the monetary authorities
Higher real interest rate increases costs of financing household consumption purchases which works to reduce what?
consumption spending
Higher real interest rates does what to the costs of financing household consumption purchases?
increases costs
Higher real interest rates increase the cost of financing capital purchases which works to reduce what?
business investment spending
Higher increases of costs does what to financing capital purchases?
rises
Higher real interest rates increases the attractiveness of domestic assets and currency increases what?
the foreign exchange value of the dollar
When the foreign exchange value of the dollar goes up this works to encourage what?
imports and discourage exports
Economists always have to show what?
downward sloping demand curves, micro or macro
An increase in real interest rate does what to aggregate demand and shifts the AD curve where?
decreases AD
shifts left
A decrease in government spending does what to aggregate demand and shifts the AD curve where?
decreases aggregate demand
shifts left
An increase in net exports does what to the aggregate demand and shifts the AD curve where?
increases AD
shifts right
An increase in consumption spending does what to aggregate spending and shifts the AD curve where?
increases AD
shifts the AD curve right
A decrease in Investment/Business spending does what to aggregate demand and shifts the AD curve which way?
decreases AD
shifts the AD curve left
An increase in financial frictions does what to aggregate demand and shifts the AD curve where?
decreases aggregate demand
shifts the AD curve left
An increase in inflation rate does what to buying power?
decreases
A decrease in buying power does what to household and business spending?
decreases
What is real money balances?
buying power
More uncertainty encourages who to spend less as inflation rises?
households and business
Higher inflation makes domestic prices rise how in foreign markets?
rise faster
Rising goods prices in foreign markets does what to export sales?
Reduces
A reduction in export sales does what to Net exports spending?
less of it
A decrease in the quantity of aggregate output demanded moves the AD curve how?
moves up the AD curve
AD curve is sloped how?
negatively
A rise in general uncertainty shifts the Aggregate demand curve where?
left
General uncertainty does what to households and business spending?
constrains it
A rise in monetary policy shifts the AD curve where?
left
A fall in monetary policy shifts the AD where?
right
A rise in government purchases shifts the AD where?
right
A fall in government purchases shifts the AD where?
left
A rise in taxes shifts the AD curve where?
left
A fall in taxes shifts the AD curve where?
right
A rise in net exports shifts the AD where?
right
A fall in net exports shifts the AD curve where?
left
A rise in investment shifts the demand curve where?
right
A rise in autonomous investment shifts the AD curve where?
right
A rise in financial frictions shifts the AD curve where?
left
The total quantity of an economy’s output of final goods and services supplies
Aggregate supply
The relationship between the quantity of aggregate output supplied and the inflation rate when all other variables are held constant
Aggregate supply curve
Price level is another term for?
inflation rates
What takes a long time to adjust to new different conditions?
wages and prices
Why is there a difference in long and short run aggregate supply curves?
prices need time to fully adjust
Long run aggregate supply curve is not determined or affected by what adjustments?
wage and price
A time frame where all short run deviations from the economy’s full employment productive capacity are resolved
long run
How many factors determine aggregate supply?
three
What three factors affect aggregate supply?
available capital
fully employed labor
available technology
Reflects the economy’s maximum productive capacity when all resources are fully employed at sustainable levels
long run aggregate suppply
The long run AS curve runs how on a graph?
vertical
Why is the long run aggregate supply curve vertical?
since inflation rate is not a productive resource
The non-accelerating inflation rate of unemployment is the unemployment rate below which the inflation rate accelerates due to?
excess demand in the economy
The non-accelerating inflation rate of unemployment is the unemployment rate above which the inflation rate decelerates due to?
excess supply
An increase in capital shifts the long run aggregate supply curve where?
right
An increase in labor shifts the long run aggregate supply curve where?
right
An increase in technology shifts the long run aggregate supply curve where?
right
A fall in the natural rate of unemployment shifts the long run aggregate supply curve where?
right
A decrease in capital shifts the long run aggregate supply curve where?
left
A decrease in labor shifts the aggregate supply curve where?
left
A decrease in technology shifts the long run aggregate supply curve where?
left
An increase in the natural rate of unemployment shifts the long run aggregate supply curve where?
Left
More heavily utilized labor reduces what?
the natural rate of unemployment
What is the total quantity of an economy’s output of final goods and services supplied?
aggregate supply
In the short run wages and prices tend to be?
sticky or rigid
As output rises above its long-run potential, demand for resources does what?
bids up wages and prices
The speed of wage and price adjustments is what in economics?
its much debated
What is much debated in economics?
speed of wage and price adjustments
Perfectly flexible wages and prices/perfect sensitive inflation rate response to the output gap imply a perfectly vertical what?
Aggregate supply curve
A rise in expected inflation does what to the aggregate supply curve?
shifts it up
A rise in price shock does what to aggregate supply curve?
shifts up
A rise in output gap does what to the aggregate supply curve?
shifts up
A fall in expected inflation does what to the aggregate supply curve?
shifts down
A fall in price shock does what to the aggregate supply curve?
shifts down
A fall in output gap does what to the aggregate supply curve?
shifts down
A rise in expected inflation or price shock does what to the short run aggregate supply curve?s
shifts up
What are the differences between actual GDP and potential GDP?
output gaps
The output that would be produced if the economy’s resources were fully employed at their long-run sustainable intensities?
potential GDP
What kind of unemployment is there when potential GDP is involved?
frictional
A higher output gap does what to inflation?
increases
A persistent output gap increases expected inflation and shifts the aggregate suply curve?
Up
In the long-run, the economy exhibits what kind of tendencies?
self correcting
What does much of the debate about short run out revolve around?
The speed of the adjustment and to what extent the actions of the government should be
What is generally agreed upon about short run output?
it will eventually return to a natural rate
What adjustment process has inflexible or rigid wages that are particularly downward?
slow adjustment process
What adjustment process has a need for active government policy?
slow adjustment process
What are the two types of adjustment processes?
slow and rapid
What adjustment process has flexible wages and prices?
rapid
What adjustment process has less need for government intervention?
rapid
In this adjustment process, episodes of unemployment are short and even necessary
rapid adjustment
In this adjustment process long periods of unemployment destroy job skills and make future employment more difficult
slow adjustment
A shift in aggregate demand to the right due to a positive demand shock does what to output and inflation?
increases
A negative demand shock shifts the Aggregate demand curve where?
left
A positive demand shock shifts the AD curve where?
right
A negative supply shock shifts the AS curve where?
up
A shift in the AS curve up does what to inflation and output?
increases inflation
decreases output
A permanent negative supply shock shifts the LRAS curve where?
left
A permanent negative supply shock shifts the AS curve where?
up
What can occur during health care cost slow down, computerization of business processes, and rapid spread of online use?
positive permanent supply shock
A permanent positive supply shock shifts LRAS where?
right
A permanent positive supply shock shifts AS where?
down
A permanent positive supply shock leads to what?
permanent rise in output
permanent decrease inflation
Permanent supply shocks affect output and inflation where?
short and long run
Temporary supply shocks affect output and inflation when?
Only in the short run
A permanent supply shock that will result in higher prices means there will be an immediate rise in what?
inflation
One group of economists believes tat business cycle fluctuations result from?
permanent supply shocks alone
The theory that says business cycle fluctuations result from permanent supply shocks alone is called?
real business cycle theory
Monetary policy tightening does what to aggregate demand?
decreases
A decrease in aggregate demand does what to ouput?
lowers
A decrease in output does what to inflation?
decreases
These can occur as a result of changes in labor costs or other product costs
supply shocks
