106 terms

# Chapter 13 Aggregate Demand

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The aggregate supply curve shows_____________________
shows the total quantity of output that firms will produce and sell at each price level assuming all else equal
How does the cost of production, such as a high price of oil (or other energy price) matter in short run aggregate supply?
Firms have to pay a higher cost of production due to the higher price of oil, which would lower unit profit. Some firms have to exit the market, and other firms would cut back production to survive a time of high cost of production
What makes the aggregate demand supply curve to shift?
When it increases, it shifts rightward and a decrease of it is a shift leftwwards
When aggregate demand increases____________________________
output increases
Labor productivity is determined by what?
physical capital, human capital, and technology
When productivity increases________________________________
Firms would be able to produce more at the given price level, which would increase short run aggregate supply, or shift the aggregate supply curve rightward
What would constitute as a cost of production?
The major costs of production are labor cost (nominal wage, unit labor cost, payroll tax, or benefits), energy price, input price (commodity price), and other costs associated with production
What is the output gap?
Where actual GDP deviates from potential GDP, the output that an economy produces given full employment of its available resources, exists in the economy
What is a recessionary gap?
During a recession, actual output is less than potential output
What is an inflationary gap?
During a boom, actual output is above potential output
As consumer sentiment deteriorates____________________________
aggregate demand decreases, and firms experience a fall in sales.
Business cycles examine_____________________time horizons while growth theory focuses on_________________time horizons.
Short run, long run
The aggregate demand-aggregate supply model is used to study what?
Aggregate demand and aggregate supply refer to what?
demand and supply of GDP, respectively.
A decrease in the price level will_________________the nominal interest rate and cause a(n)____________________movement along the aggregate demand curve.
decrease, downward
An increase in the real wealth in China will cause.
Increase U.S. aggregate demand, increase Chinese aggregate demand
Net exports will ________________________when the value of the dollar falls and shift the aggregate demand curve____________________
increase, right
A technological advancement will cause which of the following to occur?
Increased long-run and short-run supply
What does not determine a country's ability to produce goods and services in the long run?
price level
The price level increases. This will cause the short-run aggregate supply to______________________
Neither increase or decrease
Input prices decrease. This will cause the short-run aggregate supply to___________________________
Increase
Firms and workers expect the price level to fall. This will cause the short-run aggregate supply to________________________
Increase
The price level decreases. This will cause the short-run aggregate supply to________________________________
Neither increase or decrease
New policies cause an increase in the cost of meeting government regulations. This will cause the short-run aggregate supply to________________________________
Decrease
The number of workers in the labor force increases. This will cause the short-run aggregate supply to____________________
Increase
The price level increases. This long-run aggregate supply curve will______________________
Remain unchanged
The stock of capital in the economy increases. The long-run aggregate supply curve will
Shift to the right
Natural resources increase. The long-run aggregate supply curve will
Shift to the right
The price level decreases. The long-run aggregate supply curve will
Remain unchanged
Firms and workers expect the price level to rise. The long-run aggregate supply curve will
Remain unchanged
The number of workers in the labor force increases. The long-run aggregate supply curve will
Shift to the right
Who demands in the economy?
-Consumers (households)-consumption
-government-expenditure on goods & services
-foreign countries- net export
If aggregate price level decreases____________________
purchasing power of households would increase which increases consumption
What is the wealth effect?
Purchasing power increases, consumption increases, aggregate demand increases
What is the interest rate effect?
Value of money increases, saving increases, nominal interest rate decreases, consumption increases, interest increases, aggregate demand increases
What is the international trade effect?
U.S goods cheaper compared to foreign goods, export increases, net export increases, aggregate demand increases
What is this describing: Assuming all else equal, a lower price level leads higher real wealth values, and higher quantity of output demanded.
Wealth effect
What is this describing: Assuming all else equal, a higher price level leads to a decrease in export and a lower quantity of output demanded
What happens when a tax cut occurs?
-Disposable income increases
-households would spend more
-consumption increases
-total output demanded would increase
What is total output demanded or aggregate demand equation?
aggregate demand= consumption + investment + government spending + net export
What is the long run aggregate supply curve
Shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages were fully flexible
In the long run an economy's production of goods and services depends on what?
it's supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services
Per unit profit=
unit revenue-unit cost
If one produces more then_________________________
one needs to hire more labors, therefore total cost would go up
What is the short run aggregate supply curve?
Relationship between aggregate price level and total output produced in the short run (assuming else equal), upward sloping, sticky price (wage rigidity)
How does cost of production, such as nominal wage matter in short run aggregate supply?
-nominal wage increases
-businesses have have lower unit profit
-either exit the market or cut back production to survive
What is self correcting in the economy?
When shocks to aggregate demand affect aggregate output in the short run but not the long run, economy is self-correcting in the long run
What is the stabalization policy?
the use of government policy to reduce the severity of recessions and rein in exclusively strong expansions
Assuming all else equal, stock market collapses and consumer sentiment level deteriorates what would happen in the economy?
-aggregate demand would decrease
-in short run, total output decreases and price level decreases
-in long run, total output back to potential output and price level decreases
A lower price level in the United States affects the purchases of imported goods
Import purchases decrease, Aggregate demand increases
The price level increases. This will cause the aggregate demand curve to
Neither increase or decrease
Investment decreases. This will cause the aggregate demand curve to
decrease
Imports decrease and exports increase. This will cause the aggregate demand curve to
increase
The price level decreases. This will cause the aggregate demand curve to
Neither increase or decrease
Consumption increases. This will cause the aggregate demand curve to
increase
Government purchases increase. This will cause the aggregate demand curve to
Increase
Suppose that the economy is in long-run equilibrium. A sudden shift to which curve will eventually result in a new long-run equilibrium where the price level is exactly the same as it was initially?
short-run aggregate supply
A war in the Middle East that cuts off the oil supply will affect
short-run aggregate supply
In the short-run Real GDP________________________________, unemployment______________________ and price level_____________________
increases, decreases, increases
In the long run Real GDP____________________________, unemployment____________________________ and price level _________________________
has no change, has no change, increases
In the long run, changes in aggregate demand______________________
The short run aggregate supply curve is graphed________________
based on the assumption that input prices are sticky, meaning
If anything does happen to change input prices or resource prices for firms this would lead to a ________________
shift in short-run aggregate supply
3 ways that can cause a short-run aggregate supply shift
-supply shock-good weather or bad weather for a particular season, bad weather would increase input prices and shift short run aggregate supply
-expected price level- workers negotiate input prices expect prices to rise in the future, this will increase input prices and shift supply from S1 to S2
-corrections to past errors in expectations-underestimated inflation in the economy come back and renegotiate higher input prices this will shift the supply curve
What does the real business theory focus on?
production and technology
What does the keynesian theory focus on?
aggregate demand and future expectations
What does the montetarist theory focus on?
focuses on prices and interest rates
What is aggregate demand?
Shows the relationship between aggregate pricee and aggregate output demanded by households, businesses, government, and rest of the world
How is aggregate output measured?
Using real GDP
What does the aggregate demand curve show?
As aggregate price decreases, output demanded by households, firms, government and other economies increases, it is downward sloping
Output demanded=aggregate price
inverse relationship, as aggregate price increases, output decreases, if a tax cut occurs consumers spend more therefore output demanded increases
What is the Aggregate Demand Function?
Interest rates would change aggregate demand, when the money supply increases interest rates would go down, which in turn increases aggregate demand
What is potential output?
Maximum quantity that an economy can produce given full employment of it's existing levels of labor, physical capital, and technology, if all prices including wages were fully flexible
What is Long Run Supply?
Condition dependent, when all prices including wages are fully flexible, productivity determines capacity to produce
What is short run aggregate supply?
Where rigidity exists, when there are sticky wages due to price decreases, firms would not be able to lower
If an economy is operating at a real GDP level which is below its potential real GDP (full output), one will find ____.
relatively high unemployment levels
Aggregate Demand curve will shift left ____. (assuming all else equal)
if there is a decrease in household wealth
You work for the government of the economy. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the currency in the economy, which increases net exports.
Following your policy recommendation, the value of the currency in the economy is reduced.
Assuming all else equal, this policy will cause the unemployment rate to ___ in short run.
decrease
Net exports will ____ when the value of the dollar falls and the aggregate demand curve will shift ___.
increase, right
You work for the government of the economy. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the currency in the economy, which would increase net exports.
Following your policy recommendation, the value of currency in the economy is reduced.
Assuming all else equal, this policy will cause the price level ___ in long run.
increase
Assuming all else equal, investment decreases. This will cause the aggregate demand curve to _____.
decrease
You work for the government of the economy. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the economy's currency, which increases net exports.
Following your policy recommendation, the value of currency in the economy is reduced.
Assuming all else equal, this policy will cause the price level to ____ in short run.
Increase
When the aggregate price level falls, the purchasing power of assets rise which leads to ____. (assuming all else equal)
an increase in the quantity of aggregate output demanded
In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects, because oil is an important resource in the production of many goods and services.
Assuming all else equal, what would have happened in the economy in the short run?
The price level ____, output ____, and unemployment rate ____.
increased; decreased; increased
Which of the following determines a country's ability to produce goods and services in the long run?
technology
When wages increase, this causes:
...
Which of the following policies will shift the AD curve to the left?
...
Starting from its potential output, an economy's government decides to increase spending. In the long run, an economy will find:
that it is producing at its potential output but at a higher aggregate price level.
In 2011, a record breaking earthquake and tsunami hit Japan and destroyed roads, buildings, and nuclear power plants. How will this natural disaster impact the Japanese economy in the short run? (assuming all else equal)
Real GDP will decrease, price level will increase, unemployment will increase
Which of the following does not determine a country's ability to produce goods and services in the long run?
price level
In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects, because oil is an important resource in the production of many goods and services.
Assuming all else equal, what would have happened in the economy in the long run?
Output is ____ it was before the oil price spike.
the same as
Assuming all else equal, imports decrease and exports increase. This will cause the aggregate demand curve to ____.
increase
An increase in the price of crude oil from \$100 a barrel to \$200 a barrel will most likely affect ____. (assuming all else equal)
short-run aggregate supply
If an economy is in short run equilibrium such that the level of output is greater than the potential output, then this means that ____. (assuming all else equal)
...
In an inflationary gap____________
aggregate output is greater than potential output
If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then in the long run, one will find:
nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP.
Assuming all else equal, the price level increases. This will cause the Aggregate Demand curve to ___.
stay the same
If an economy is in short run equilibrium such that the actual level of output is greater than the potential level of output, then this means that ____. (assuming all else equal)
after some time, nominal wages will rise.
You work as an economist for the government. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the currency in the economy, which would increase net exports.
Following your policy recommendation, the value of currency in the economy is reduced.
Assuming all else equal, this policy will cause real GDP to _____ in short run.
increase
In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects, because oil is an important resource in the production of many goods and services.
Assuming all else equal, what would have happened in the economy in the long run?
The price level is ____ it was before the oil price spike.
higher than
You as an economist for the government. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the currency in the economy, which would increase net exports.
Following your policy recommendation, the value of currency in the economy is reduced.
Assuming all else equal, this policy will cause the price level ___ in long run.
...
Aggregate Demand curve will shift left ____. (assuming all else equal)

a) if government decreases taxes paid by households

b) because of the wealth and interest rate effects.

c) if the aggregate price level falls

d) if there is a decrease in household wealth
if there is a decrease in household wealth
Starting from its potential output (long run output), an economy's government decides to increase spending. In the long run, the economy will find _____.
...
If an economy is currently operating at an output level below its potential real GDP, if government wishes use fiscal policy to bring the economy back to its potential real GDP, it will:
increase government spending.
Sticky wages and prices occur:
in the short run.
You work as an economist for the government. After taking an economics course, you decide that devaluing the currency is the way to increase GDP. Devaluation would decrease the value of the currency in the economy, which increases net exports.
Following your policy recommendation, the value of the currency in the economy is reduced.
Assuming all else equal, this policy will cause the unemployment rate to ___ in short run.
...