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AP MACRO ECON > Unit 3- Aggregate Demand: Introduction And Determinents > Flashcards

Unit 3- Aggregate Demand: Introduction And Determinents Flashcards

1
Q

Aggregate Demand

A

The demand for all goods/services in all markets rather than the demand for one good/service in 1 market

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2
Q

Aggregate Demand Curve

A

Relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government and rest of the world

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3
Q

Why the Aggregate Demand Curve Downward Sloping

A

The Wealth Effect and Interest Rate Effect

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4
Q

The Wealth Effect

A

Rise in aggregate price level, decrease in purchasing power

*The change in consumer spending caused by the altered purchasing power of consumer assets

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5
Q

Interest Rate

A

the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money

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6
Q

Shifts in Aggregate Demand Curve

A

Shift in expectations, changes in wealth, and size existing stock of physical capital. As well as fiscal and monetary policy
- GDP

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7
Q

Changes in Expectations

A

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
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8
Q

Changes in Wealth

A

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

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9
Q

Size of Existing Stock of Physical Capital

A

The more someone has the less they feel they need to add more

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10
Q

Government Policies and Aggregate Demand

A

Fiscal and Monetary Policy

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11
Q

Fiscal Policy

A

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
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12
Q

Monetary Policy

A

Use of changes in quantity of money or interest rates to stabalize the economy
- increase in money shifts to right

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13
Q

What determined negative slope of aggregate demand curve?

A

Wealth and Interest Rate Effect

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14
Q

What will shift ad to right?

A

A decrease in existing stock capital

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15
Q

The consumer confidence index is used to measure what?

A

Consumer Expectations

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16
Q

Decrease in stock market decrease aggregate demand by decreasing what?

A

Consumer Wealth

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17
Q

What government policy will shift the aggregate demand curve to the left

A

A decrease in quantity of money

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18
Q

Aggregate Supply

A

Sharp fall in aggregate demand- a reduction in the quantity of goods/services demanded at any given price level

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19
Q

Aggregate Supply Curve

A

Relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

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20
Q

Short Run Aggregate Supply Curve

A

Greater aggregate in price level, greater in quantity of aggregate output supplied

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21
Q

Profit per Unit=

A

Profit per unit- Price per unit of output- production cost per unit of output

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22
Q

Wages

A

Way employees are compensated for their work including health care and retirement output

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23
Q

Nominal Wages

A

The dollar amount of wage paid

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24
Q

Sticky Wage

A

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

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25
Q

Nominal Wages Can’t Be ______ Forever

A

Sticky

- ultimately formal and informal contracts/agreements will be renegotiated to adjust to econ circumstances

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26
Q

Perfectly Competitive Market

A

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

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27
Q

Imperfectly Competitive Market

A

Producers have some right to determine how much to charge

- positive relationship in short run

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28
Q

Short Run Aggregate Supply Curve

A

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

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29
Q

Short Rin Aggregate Supply Curve- Along the curve

A

Change in aggregate supply level

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30
Q

Shifts of Short Run Supply

A

-IRAP

— Commodity Prices, Wages, Productivity, Expections

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31
Q

Commodity Price

A

Commodity- a standardized input bought and sold in bulk quantities
- increase in commodity raises production costs, decreasing quantity produced

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32
Q

Changes in Nominal Wages

A

At any given point in time, wages are fixed because of contracts/agreements
- nominal wages increases, supply decreases

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33
Q

Changes in Productivity

A

increase in productivity means that a worker can produce more
- inc erase in prod., increase in agg. Supply

34
Q

Changes in Expectations about inflation

A

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

35
Q

Long Run Aggregate Supply Curve

A

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

36
Q

Potential Output

A

The level of real GDP the economy would produce if all prices including nominal wages, were fully flexible
- horizontal intercept on long run supply

37
Q

What will shift the short run in aggregate supply?

A

Profit/unit at any given price level, commodity prices, nominal wages, productivity

38
Q

Because changes in aggregate prices level have no effect on aggregate output in the long run, the longer run aggregate supply curve is…

A

Verticle

39
Q

The horizontal intercept of the long run aggregate supply curve is…

A

Potential output

40
Q

That Employers are reluctant to decrease/raise nominal wages is describes as…

A

Sticky

41
Q

The AD- AS Model

A

Used together to analyze the economy fluctuations

42
Q

Short Run Macro Econ Equil

A

The point in which aggregate output supplied is equal to the quantity demanded

43
Q

Short Run Equilibrium Price Level

A

The Aggregate price level in the short-run macroecon equilibrium

44
Q

Short Run Equilibrium Aggregate Output

A

The Quantity of aggregate output produced in the short-run macroecon equilibrium

45
Q

Demand Shock

A

An event that shifts the agg. Demand curve

- change in expect/wealth, size of stock, etc.

46
Q

Negative Demand leads to…

A

Lower price level output

47
Q

Positive Demand Shock leads to…

A

Higher aggregate price level output

48
Q

Supply Shock

A

An event that shifts the short-run agg supply curve

49
Q

Stagflation

A

The combination of inflation adn stagnating (or falling) agg. Output

50
Q

Recessionary Gap

A

When Agg. Output is below potential output

51
Q

Inflationary Gap

A

When agg. Output is above potential output

52
Q

Output gap

A

% difference between actual agg. Output and potential output

53
Q

Output Gap=

A

Output Gap= (Actual Output -Potential Output)/(potential Output)x100

54
Q

Self-correcting

A

When shocks to aggregate demand affect agg. output in the short run, but not the long run

55
Q

What causes a neg supply shock?

  1. Tech advance
  2. Increase in productivity
  3. Increase in oil prices
A
  1. Increase in oil Prices
56
Q

Which cases a positive demand shock?

A

Increase in wealth

57
Q

During Stagflation what happens to the aggregate prices level and real GDP?

A

Aggregate Price Level- Increases

Real GDP- Decreases

58
Q

Macroeconomy Policy

A

Econ is self correction in the long run- it’ll eventually trend back to potential output
- but takes decades or more therefore give intervenes

59
Q

Stabilization Policy

A

Use of government policy to reduce the severity of recessions and rein in excessively string expansions

60
Q

Why is a policy that short-circuits the adjustment and maintains economy at original equilibrium desirable?

A
  1. The temporary fall in agg output is associated to high unemployment
  2. Price stability is generally regarded as a desirable shot
61
Q

2 problems with trying to fix supply shock

A

Decrease in agg. Output- increase unemployment- and increases agg. Price level

62
Q

Social Insurance programs

A

Government programs intended to protect families against econ hardships
Ex. Social Security, Medicare, Medicaid, food stamps, etc

63
Q

Expansionary Fiscal Policy

A 
Fiscal Policy that increases agg. Demand curve
Takes following forms:
- increase in gov purchases
- decrease in taxes
- increase in gov transfers
64
Q

Contractionary Fiscal Policy

A 
Reduces Agg. demand 
Implemented by:
- decrease in gov purchases
- increase in taxes
- decreases in gov transfers
65
Q

Marginal Propensity to Consume (MPC)

A

Then increase in consumer spending when disposable income rises $1

66
Q

MPC=

A

MPC= change in consumer spending/ change in disposable income

67
Q

Marginal Propensity to save (MPS)

A

The increase in household savings when disposable income rises by $1

68
Q

MPS=

A

MPS= 1-MPC

69
Q

Total Effect of Increase in Investment Spending (I)=

A

I= 1/(1-MPC) X amount increase

70
Q

Autonomous Change in Aggregate Spending

A

An initial rise/fall in aggregate spending that is the cause, not the result, of a series of income and spending changes

71
Q

Spending Multiplier

A

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

72
Q

Total changing in real GDP (Y)=

A

Y= (1)/(1-MPC) X AAS

ASS: autonomous Change in aggregate spending

73
Q

Consumption Function

A

Shows how a households consumer spending varies with the households current disposable income

74
Q

Autonomous Consumer Spending

A

The amount of money a household would spend if it had no disposable income

75
Q

Aggregate Consumption Function

A

The relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

76
Q

Planned Investment Spending

A

The investment spending that businesses intend to undertake during a given period

77
Q

Inventory Investment

A

The value of the change in total inventories held in the economy during a given period

78
Q

Actual Investment Spending=

A

I= I unplanned- I planned

79
Q

Unplanned Inventory Investment

A

When actual sales are lower than business expected, leading to unplanned increases in inventories

80
Q

Crowding Out

A

Where increase public sector spending replaces or drives down private sector spending

81
Q

Problems with Fiscal POlicy

A

Problems with Timing
Politically Motivated Policies
Crowning Out Effect
Net Export Effect

AP MACRO ECON (5 decks)

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