Macro Economics Chapter 10 Power Point Flashcards
What is the difference between market and aggregate models?
The market model measures physical units whereas the aggregate model measures value.
What is the aggregate demand curve?
The curve shows the level of real GDP purchased by everyone at different price levels during a time period, ceteris paribus.
What does the horizontal axis measure?
The value of final goods and services included in real GDP measured in base year dollars.
What does the vertical axis measure?
It is an index of the overall price level, such as the GDP deflator or the CPI.
Why does the aggregate demand curve slope downward to the right?
•Real balances effect•Interest-rate effect•Net exports effect
What is the real balances effect?
Consumers spend more on goods and services because lower prices make their dollars more valuable.
What is the interest-rate effect?
Assuming fixed credit, an increase in the price level translates through higher interest rates into a lower real GDP.
What is the net exports effect?
A higher domestic price level makes U.S. goods more expensive compared to foreign goods, exports decrease, imports increase, decreasing real GDP.
Decrease in the price level equals?
Increase in the real GDP demanded.
What can cause a shift in the aggregate demand curve?
Consumption, investments, government spending and net exports can change.
Increase in C,I, G, (X-M) equals?
Increase in the aggregate demand curve
What is the aggregate supply curve?
Shows the level of real GDP produced at different price levels during a time period, ceteris paribus.
Why did Keynes assume fixed product prices and wages?
During a deep recession or depression, there are many idle resources in the economy.
Why do idle resources mean fixed prices?
Producers are willing to sell additional output at current prices because there are plenty of resources to go around for everyone who wants them.
Why do idle resources mean fixed wages?
Unemployed workers willing to work for the prevailing wage diminish the power of workers to increase their wages.
What kind of supply curve would explain fixed prices and wages?
A horizontal supply curve
Government spending (G) increases and has what effect?
Aggregate demand increases and the economy moves from E1 to E2. Price level remains constant, while real GDP and employment rise.
According to Keynes, what will a shift in aggregate demand do?
It will restore a depressed economy to full employment.
What is the classical view of the aggregate supply curve?
It is a vertical line at the full employment output.
According to the classical economists, where does the economy normally operate?
The economy normally operates at its full employment level.
How do the classical economists view prices and costs?
The price level of products and production costs change by the same percentage in order to maintain full employment.
Aggregate demand decreases at _____ _______?Unemployment causes a decrease in ________? The economy moves to a level of ____ _____?
full employmentpricesfull employment
What are the two types of inflation?
•Cost push•Demand pull
What is cost push inflation?
A rise in the general price level resulting from an increase in the cost of production.
What is stagflation?
High unemployment and rapid inflation exist simultaneously.
What is demand pull inflation?
A rise in the general price level resulting from an excess of total spending.
What determines the business cycle?
Shifts in the aggregate demand and aggregate supply curves.
What happens when both curves increase?
That depends on how much each increases.
Increase in aggregate demand and supply leads to an Increase in ______ _____ and an increase in _______ ________.
real GDPprice level
