Unit 3 Flashcards
Aggregate Demand
All goods/services (real GDP) that buyers are willing/able to purchase at different prices
What is the relationship between price level and real GDP (direct or inverse?)
inverse
Aggregate demand equation
AD= C+I+G+Xn
3 things (effects) that cause AD to slope downward
- Wealth effect
- interest rate effect
- foreign trade effect
wealth effect
higher price levels reduces purchasing power and the quantity of expenditures
Interest rate effect
when price levels increase, lenders charge higher interest rates to get a real return on loans
foreign trade effect
when US Prices rise, foreign buyers purchase less US goods, and Americans buy more foreign goods
shifters of AD (4)
- Change in consumer spending
- changes in investment spending
- changes in govt. spending
- changes in net export spending
things that cause a change in consumer spending
higher incomes, consumer expectations, household debt
things that cause a change in investment spending
real interest rates, future business expectations, taxes
things that cause a change in govt. spending
govt. expenditures, increase in public works programs
things that cause a change in net exports
exchange rates, national income compared to abroad, recessions
multiplier effect
shows how spending is magnified in the economy (velocity of money)
MPC
amount people consume rather than save when a change occurs in disposable income
MPC formula
change in consumption/
change in disposable income
MPS
amount people save rather than consume when a change occurs in disposable income
MPS formula
change in savings/
change in disposable income
Spending Multiplier Formula
1/ or 1/
MPS 1-MPC
Total change in GDP formula
multiplier * initial change in spending
simple tax multipier
1/
1-MPC
What does aggregate supply do?
It differentiates between short and long run. It has 2 curves
Long Run AS
Wages/resources are flexible. It changes as price levels change
Short Run AS
wages/resources prices are sticky. It does not change as price levels change
Shifters of AS
- resources
- government action
- inflationary expectations
Examples as to how resources changes AS (3)
- change in resource prices
- supply shocks
- inflationary expenses
how does Govt. Action shift AS (3)
- Taxes on producers
- Subsidies
- Inflationary expectations
how does productivity shift AS (1)
- technology
