Macroeconomics - Ch 12

Question 1

Aggregate Demand-Aggregate Supply Model (AD-AS Model)

Answer 1

a variable price-variable output model that allows both the price level and level of real GDP to change

Question 2

Aggregate demand

Answer 2

schedule/curve that shows the amount of a nation’s output (Real GDP) that buyers collectively desire to purchase at each possible price level

Question 3

Real-balances effect

Answer 3

a higher price level reduces the real value or purchasing power of the public’s accumulated savings balances

Question 4

Interest-rate effect

Answer 4

when the price level rises, consumers need more money for purchases and businesses need more money to meet their payrolls and to buy other resources (higher price level increases the demand for money)

Question 5

Foreign Purchases Effect

Answer 5

when the US price level rises relative to foreign price levels (and exchange rates do not respond quickly or completely), foreigners buy fewer US goods and Americans buy more foreign goods; therefore US exports fall and US imports rise (rise in price level reduces the quantity of US goods demanded as net exports)

Question 6

Determinants of Aggregate Demand (Aggregate Demand Shifters)

Answer 6

factors such as consumption spending, investment, gov’t spending, and net exports that, if they change, shift the aggregate demand curve

Question 7

Aggregate Supply

Answer 7

schedule/curve showing the relationship between a nation’s price level and the amount of real domestic output that firms in the economy produce

Question 8

Immediate-short-run aggregate supply curve

Answer 8

AS subscript ISR; an aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts; a horizontal aggregate supply curve that implies an inflexible price level

Question 9

Short-run aggregate supply curve

Answer 9

AS slopes upward; with input prices fixed, changes in the price level will raise or lower real firm profits

Question 10

Long-run aggregate supply curve

Answer 10

AS subscript LR; vertical at full-employment; in the long run, the economy will produce the full-employment output level no matter what the price level is

Question 11

Determinants of aggregate supply (aggregate supply shifters)

Answer 11

factors such as input prices, productivity, and the legal-institution environment that, if they change, shift the aggregate supply curve

Question 12

Productivity

Answer 12

measure of the relationship between a nation’s level of real output and the amount of resources used to produce that output; = total output/total inputs

Question 13

Equilibrium price level

Answer 13

the price level at which the aggregate demand curve intersects with the aggregate supply curve

Question 14

Equilibrium real (domestic) output

Answer 14

GDP at which the total quantity of final goods and services purchases (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve

Question 15

Menu costs

Answer 15

the reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants

Question 16

Efficiency wages

Answer 16

wages that elicit maximum work effort and thus minimize labor costs per unit of output