Exam 2 Chapter 12 Flashcards
The model of aggregate demand and aggregate supply shows you what?
Ties in output, prices, and employment all into one equilibrium
What how is aggregate demand calculated?
Y = C + I + G + NX
What are 3 things that cause the aggregate demand curve to slope downward?
- wealth effect (consumption)
- interest rate effect (investment)
- foreign purchases effect (NX)
Wealth Effect
People decrease consumption as price of the good rises.
Because purchases decrease their wealth
*Wealth Effect doesn’t occur if prices increase proportionally with working wages
Interest Rate Effect
Says as prices rise, interest rates rise also
causes a decrease in investments
Foreign Purchase Effect
Says as U.S. price of goods increase, people begin to Import more goods
*Don’t want to pay high domestic prices
What constitutes a movement along the Aggregate Demand curve?
What constitutes a shift?
Change in overall prices = movement
Shift = change in non-price factor
What is it called when the Aggregate Demand curve shifts left or right?
Positive demand shock
or
Negative demand shock
___ is the sum total of the production of all the firms in the economy
Aggregate supply
The ___ shows the relationship between the overall price level in the economy and total production by firms.
aggregate supply curve
What are the 5 factors that shift AD curve through consumption?
- taxes on consumers
- interest rates
- housing markets
- stock market
- consumer’s confidence
3 facts that shift AD curve through investments?
- taxes on capital
- business’s confidence
- interest rates
What does the LRAS curve show? What does it stand for?
- long-run aggregate supply
- shows the potential output for economy if it operates at full capacity
The long run production (LRAS) can shift due to these to things:
- Productivity
- Quantities of factors of production
True or False: The potential output of the LRAS curve is affected by price level.
False
What is potential output labeled as on the graph?
Y*
___ are fluctuations of output around the level of potential output.
Business Cycles
Describe and economic boom and economic recession
Economic Boom
output > potential output (Y*)
Economic Recession
output (Y) < potential output
What are sticky input prices?
price of final goods increases at faster rate than input prices
due to set contracts with suppliers
What are sticky input prices effect on the Aggregate Supply curves
Causes it to slope upward
The “long-run” part of the LRAS curve is the time required for ___to fully adjust to economic conditions.
input prices
What causes a change in the SRAS curve but not the LRAS curve and why?
Change in Price of Inputs
because of “Sticky input Prices”
*In long run, the input prices get adjusted
Lowering minimum wage below the equilibrium wage has what effect on unemployment?
Stays the Same
Raising minimum wage above the equilibrium wage has what effect on unemployment?
Increases it
True or False: Consumption is maximized when Unplanned Inventories = Planned Inventories
False
If a foreign economy china crashes, how does this affect AD/AS?
AD shifts less
*China has less money to spend on U.S.
Do the LRAS and SRAS have a positive slope or negative?
SRAS positive slope
LRAS no slope (is a vertical line)
The economic growth of the U.S. in the past 100 years was ___ %
2%
How do you calculate the MPC?
(change in consumption) / (change in output Y)
