What is Aggregate Demand ?
a schedule or curve that shows the amounts of real output that buyers collectively desire to purchase at each possible price level
Why does the Aggregate Demand curve slope downward?
because of the real balances effect, interest-rate effect, foreign purchases effect
What is the Real Balances Effect?
higher price level reduces purchasing power of public's accumilated savings balance; the public is thus poorer and reduces spending
What is the Interest Rate Effect?
because of the fixed supply of money, money is scarce at higher demands thus driving interest rates up
What is the Foreign Purchases Effect?
rise in price level reduces quantity of U.S. goods demanded as net exports
Whatare the two componets of a change in aggregate demand?
A change in a determinant of demand; the multiplier effect
What is the multiplier effect?
describes how an increase in some economic activity starts a chain reaction that generates more activity than the original increase.
What is the equation for the multiplier effect?
Multplier = change in real GDP
Inital change in spending
Change in GDP= multiplier X Inital change in spending
What are the determinants of demand?
consumer spending, investment spending, government spending, and net export spending
What is aggregate supply?
a schedule or curve showing the level of real domestic output that firms will produce at each price level
What is long run aggregate supply?
long run aggregate supply is a period in which nominal wages (and other resource prices) match changes in price level
The Long Run Aggregate Supply Graph is _______---
What is short run aggregate supply?
A period in which nominal wages (and other resource prices) do not respond to price level chages
During short run aggregate supply there is a ___________ relationship between price level and real output
What does per unit production cost establish ouput price level ?
because price level must cover the cost of production
What is the equation for per unit production cost ?
Per Unit Production Cost = total input cost
units of output
Why is short run aggregate supply flat at output below full employment
as out put expands there are few shortages of inputs so price level is not driven upward
Why is short run aggregate supply at outputs above full employment ?
at outputs beyond full employment most resources are fully employed which creates a competition for resources driving prices up
What are the determinats of aggregate supply ? (SRAS)
Inputs, productivity, legal institution environment
At equilibrium what does demand pull inflation do ?
demand pull inflation creates an increase in aggregate demand and creates a positive GDP gap
What does a negative GDP gap represent ?
A depressed economy
What does a positive GDP gap represent ?
A ecnomoy operating beyond full employment
What does a decrease in aggregate demand do ?
. causes cyclical unemployment and inflation
. creates a negative GDP gap
. causes the "sticky wages" effect
What are sticky wages and when do they occur ?
Sticky wages occur during declines in aggreagte demand due to wage contracts; morale effort and productivity; minimum wage; menu costs and fear of price wars
When does a decrease in cost push inflation occur ?
Decrease in cost push inflation occurs during decreases in aggregate supply