Unit 3- Aggregate Demand: Introduction And Determinents Flashcards
Aggregate Demand
The demand for all goods/services in all markets rather than the demand for one good/service in 1 market
Aggregate Demand Curve
Relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government and rest of the world
Why the Aggregate Demand Curve Downward Sloping
The Wealth Effect and Interest Rate Effect
The Wealth Effect
Rise in aggregate price level, decrease in purchasing power
*The change in consumer spending caused by the altered purchasing power of consumer assets
Interest Rate
the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money
Shifts in Aggregate Demand Curve
Shift in expectations, changes in wealth, and size existing stock of physical capital. As well as fiscal and monetary policy
- GDP
Changes in Expectations
Both consumer spending and planned in investment depend in part of people’s expectations of future
- expect higher income- buy more
- expect more sales- invest more
Changes in Wealth
Depends in part on value of household assets
- when real value of assets rises, purchasing power also rises leading to inc redase in Aggregate spending
Size of Existing Stock of Physical Capital
The more someone has the less they feel they need to add more
Government Policies and Aggregate Demand
Fiscal and Monetary Policy
Fiscal Policy
The use of either government spending or gov purchases of final goods/services and gov transfers or tax policy to stabalize the economy
- raise/lower taxes
- raise/decrease spending
Monetary Policy
Use of changes in quantity of money or interest rates to stabalize the economy
- increase in money shifts to right
What determined negative slope of aggregate demand curve?
Wealth and Interest Rate Effect
What will shift ad to right?
A decrease in existing stock capital
The consumer confidence index is used to measure what?
Consumer Expectations
Decrease in stock market decrease aggregate demand by decreasing what?
Consumer Wealth
What government policy will shift the aggregate demand curve to the left
A decrease in quantity of money
Aggregate Supply
Sharp fall in aggregate demand- a reduction in the quantity of goods/services demanded at any given price level
Aggregate Supply Curve
Relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
Short Run Aggregate Supply Curve
Greater aggregate in price level, greater in quantity of aggregate output supplied
Profit per Unit=
Profit per unit- Price per unit of output- production cost per unit of output
Wages
Way employees are compensated for their work including health care and retirement output
Nominal Wages
The dollar amount of wage paid
Sticky Wage
Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
Nominal Wages Can’t Be ______ Forever
Sticky
- ultimately formal and informal contracts/agreements will be renegotiated to adjust to econ circumstances
Perfectly Competitive Market
Producers take prices as given
- because production costs are fixed, output doesn’t fall/rise in proportion to fall/rise in the price of a unit
Imperfectly Competitive Market
Producers have some right to determine how much to charge
- positive relationship in short run
Short Run Aggregate Supply Curve
Relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short-run, the time period when many production costs can be taken as fixed
Short Rin Aggregate Supply Curve- Along the curve
Change in aggregate supply level
Shifts of Short Run Supply
-IRAP
— Commodity Prices, Wages, Productivity, Expections
Commodity Price
Commodity- a standardized input bought and sold in bulk quantities
- increase in commodity raises production costs, decreasing quantity produced
Changes in Nominal Wages
At any given point in time, wages are fixed because of contracts/agreements
- nominal wages increases, supply decreases
Changes in Productivity
increase in productivity means that a worker can produce more
- inc erase in prod., increase in agg. Supply
Changes in Expectations about inflation
If inflation is expected to go up, workers may seek higher nominal wages to keep up with prices
- increase in inflation, decrease in agg, supply
Long Run Aggregate Supply Curve
In the Long Run Aggregate price level has NO effect on quantity of aggregate output supplied
- ex. Producer would recieve less for a product, but costs would fall by same proportion
Potential Output
The level of real GDP the economy would produce if all prices including nominal wages, were fully flexible
- horizontal intercept on long run supply
What will shift the short run in aggregate supply?
Profit/unit at any given price level, commodity prices, nominal wages, productivity
Because changes in aggregate prices level have no effect on aggregate output in the long run, the longer run aggregate supply curve is…
Verticle
The horizontal intercept of the long run aggregate supply curve is…
Potential output
That Employers are reluctant to decrease/raise nominal wages is describes as…
Sticky
The AD- AS Model
Used together to analyze the economy fluctuations
Short Run Macro Econ Equil
The point in which aggregate output supplied is equal to the quantity demanded
Short Run Equilibrium Price Level
The Aggregate price level in the short-run macroecon equilibrium
Short Run Equilibrium Aggregate Output
The Quantity of aggregate output produced in the short-run macroecon equilibrium
Demand Shock
An event that shifts the agg. Demand curve
- change in expect/wealth, size of stock, etc.
Negative Demand leads to…
Lower price level output
Positive Demand Shock leads to…
Higher aggregate price level output
Supply Shock
An event that shifts the short-run agg supply curve
Stagflation
The combination of inflation adn stagnating (or falling) agg. Output
Recessionary Gap
When Agg. Output is below potential output
Inflationary Gap
When agg. Output is above potential output
Output gap
% difference between actual agg. Output and potential output
Output Gap=
Output Gap= (Actual Output -Potential Output)/(potential Output)x100
Self-correcting
When shocks to aggregate demand affect agg. output in the short run, but not the long run
What causes a neg supply shock?
- Tech advance
- Increase in productivity
- Increase in oil prices
- Increase in oil Prices
Which cases a positive demand shock?
Increase in wealth
During Stagflation what happens to the aggregate prices level and real GDP?
Aggregate Price Level- Increases
Real GDP- Decreases
Macroeconomy Policy
Econ is self correction in the long run- it’ll eventually trend back to potential output
- but takes decades or more therefore give intervenes
Stabilization Policy
Use of government policy to reduce the severity of recessions and rein in excessively string expansions
Why is a policy that short-circuits the adjustment and maintains economy at original equilibrium desirable?
- The temporary fall in agg output is associated to high unemployment
- Price stability is generally regarded as a desirable shot
2 problems with trying to fix supply shock
Decrease in agg. Output- increase unemployment- and increases agg. Price level
Social Insurance programs
Government programs intended to protect families against econ hardships
Ex. Social Security, Medicare, Medicaid, food stamps, etc
Expansionary Fiscal Policy
Fiscal Policy that increases agg. Demand curve Takes following forms: - increase in gov purchases - decrease in taxes - increase in gov transfers
Contractionary Fiscal Policy
Reduces Agg. demand Implemented by: - decrease in gov purchases - increase in taxes - decreases in gov transfers
Marginal Propensity to Consume (MPC)
Then increase in consumer spending when disposable income rises $1
MPC=
MPC= change in consumer spending/ change in disposable income
Marginal Propensity to save (MPS)
The increase in household savings when disposable income rises by $1
MPS=
MPS= 1-MPC
Total Effect of Increase in Investment Spending (I)=
I= 1/(1-MPC) X amount increase
Autonomous Change in Aggregate Spending
An initial rise/fall in aggregate spending that is the cause, not the result, of a series of income and spending changes
Spending Multiplier
The ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change, it indicates that total ruse in real GDP that results from $1 of an initial rise in spending
Total changing in real GDP (Y)=
Y= (1)/(1-MPC) X AAS
ASS: autonomous Change in aggregate spending
Consumption Function
Shows how a households consumer spending varies with the households current disposable income
Autonomous Consumer Spending
The amount of money a household would spend if it had no disposable income
Aggregate Consumption Function
The relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
Planned Investment Spending
The investment spending that businesses intend to undertake during a given period
Inventory Investment
The value of the change in total inventories held in the economy during a given period
Actual Investment Spending=
I= I unplanned- I planned
Unplanned Inventory Investment
When actual sales are lower than business expected, leading to unplanned increases in inventories
Crowding Out
Where increase public sector spending replaces or drives down private sector spending
Problems with Fiscal POlicy
Problems with Timing
Politically Motivated Policies
Crowning Out Effect
Net Export Effect
