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chapter 20 - aggregate supply and aggregate demand

Terms in this set (32)

When the economy goes into a recession, real GDP ________ and unemployment ________
fall ; rises
A sudden crash in the stock market shifts
a. the aggregate-demand curve.
b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve.
c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve.
d. both the short-run and the long-run aggregate-supply curves.
a. the aggregate-demand curve.
Stagflation is caused by
a. a leftward shift in the aggregate-demand curve.
b. a rightward shift in the aggregate-demand curve.
c. a leftward shift in the aggregate-supply curve.
d. a rightward shift in the aggregate-supply curve.
c. a leftward shift in the aggregate-supply curve.
An increase in the aggregate demand for goods and services has a larger impact on output ________ and a larger impact on the price level ________.
a. in the short run, in the long run
b. in the long run, in the short run
c. in the short run, also in the short run
d. in the long run, also in the long run
a. in the short run, in the long run
three reasons why the aggregate demand curve slopes downward?
wealth effect
interest-rate effect
exchange-rate effect
wealth effect
A lower price level raises the real value of households' money holdings, which stimulates consumer spending
interest-rate effect
A lower price level reduces the quantity of money households demand; as households try to convert money into interest-bearing assets, interest rates fall, which stimulates investment spending
exchange-rate effect
As a lower price level reduces interest rates, the dollar depreciates in the market for foreign-currency exchange, which stimulates net exports.
Any event or policy that raises ___, ___, ___, or ___ at a given price level increases aggregate demand.
consumption, investment, government purchases, or net exports
The long-run aggregate-supply curve is ___.
vertical
Three theories that have been proposed to explain the upward slope of the short-run aggregate-supply curve?
sticky-wage theory
sticky-price theory
misperceptions theory
sticky-wage theory
an unexpected fall in the price level temporarily raises real wages, which induces firms to reduce employment and production
sticky-price theory
an unexpected fall in the price level leaves some firms with prices that are temporarily too high, which reduces their sales and causes them to cut back production
misperceptions theory
an unexpected fall in the price level leads suppliers to mistakenly believe that their relative prices have fallen, which induces them to reduce production.
All three theories for upward slope for short-run aggregate supply imply that output deviates from its natural level when the actual price level deviates from what?
the price level that people expected.
what causes a shift in the short-run aggregate supply curve
changes in labor, capital, natural resources, or technology
the position of the short-run aggregate-supply curve depends on what?
expected price level
When the aggregate-demand curve shifts to the left, output and prices rise or fall in the short run?
fall
When the short-run aggregate-supply curve shifts to the right or left, the effect is falling output and rising prices?
left
Over time, as a change in the expected price level causes wages, prices, and perceptions to adjust, the short-run aggregate-supply curve shifts to the left or right?
right
recession
a period of declining real incomes and rising unemployment
depression
a severe recession
model of aggregate demand and aggregate supply
the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
aggregate-demand curve
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
aggregate-supply curve
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
natural level of output
the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
stagflation
a period of falling output and rising prices
Economic fluctuations are ___ and ___
irregular and unpredictable
how to get out of a recession? (3)
increase government spending
lower taxes (leads to more consumption)
pump money into economy (lowers interest rates)
What shifts the aggregate demand curve?
interest rates, consumers, government, net exports
what is on the x axis for aggregate supply and demand
output (Y)
what is on the y axis for aggregate supply and demand
price level (P)
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