Chapter 30 Aggregate Demand and Aggregate Supply

What is the foreign purchases effect?

As price levels rise in the U.S. the cost of foreign countries to purchase our goods increases if the exchange rates don't react soon enough. So U.S> exports drop, but imports from other countries goes up. Rises in price levels, exports from the U.S> goes down

When studying the aggregate demand curve shifts what are the dashed lines and what are the overall shifts equal to?

The dashed line is the initial amount spent (say 5 million), the ending line is the multiplier (if MPC is .75, MPS is .25 1/.25=4) If the multiplier is 4 and the initial amount spent is 5 million than the outcome is 20 million via the multiplier to the new shift in aggregate demand

What dos the shape of an immediate short run aggregate supply curve (AS sub ISR) look like?

The immediate short run aggregate supply curve is a horizontal line due to both input and output price levels being fixed

Why does the demand curve slope downward?

The income and substitution effect. When the price of an individual product falls the consumer's nominal income allows a larger purchase of the product (INCOME EFFECT), and as price alls the consumer wants to by more of the product because it becomes less expensive then other products (SUBSTITUTION EFFECT)

What are the determinants of aggregate demand?

(Aggregate Demand shifters) 1. Changes in Consumer Spending 2. Change in investment spending 3. Change in government spending 4.Change in net export spending (equation for GDP)

What are the determinants of aggregate supply?

1. Change in input prices (domestic resource prices, prices of imported resources) 2.Change in productivity 3. Change in legal institutional environment (business taxes and subsidies, government regulations)

What percentage of the average firm's costs are wages and salaries?

75 percent

What does a movement along a fixed aggregate demand curve represent?

A change in real GDP

How does investment spending shift the aggregate demand cure?

A decline in investment spending at each price level will shift the demand curve to the left

How does cost push inflation affect Aggregate Supply?

A negative determinant that shifts the AS to the left would raise the price level Cost pushes the supply curve to the left raising prices (inflation)

In terms of expected returns, how does the degree of excess capacity shift the aggregate demand curve?

A rise in excess capacity (unused capital will reduce the expected returns on new investment and decrease aggregate demand

What does each shift mean (left and right) in an aggregate supply curve

A shift to the left means a decrease in aggregate supply, a shift to the right means an increase in aggregate supply

What does an increase in aggregate supply mean?

An increase indicates that firms are willing to produce and sell more real output at each price level

What is aggregate demand?

Aggregate demand is a schedule or curve that shows the amount of a nation's output (Real GDP) that buyers desire to purchase (collectively)

What does Aggregate Supply mean?

Aggregate supply is a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce

What does an increase in government spending do to the aggregate demand curve?

An increase in government spending shifts the aggregate demand curve to the right

What are the two changes that can shift the aggregate supply curve?

Changes in taxes and subsidies Changes in the extent of regulation

What do the determinants of aggregate supply affect?

Changes in these determinants raise or lower per unit production costs at each price level or each level of output

What effects a change I consumer spending?

Consumer wealth Consumer expectations household borrowing taxes

What causes input prices to be fixed in the short run and the immediate short run?

Contractual agreements

What do you call the intersection between aggregate demand and aggregate supply curves?

Equilibrium price levels, equilibrium real output

What occurs to the equilibrium real output when aggregate demand shifts to the right?

Equilibrium real output lowers, level is below full employment, recession occurs, cyclical unemployment rises GDP GAP BUT NO DEFLATION due to downward inflexibility

What is a reason why prices would be downward inflexible?

Fear of price wars Menu Costs Wage Contracts (due to contractual agreements, you can't profit from cutting wage rates) Morale, Effort, and Productivity-efficiency wages, dropping wages may lower production costs but efficiency would be impaired as well Minimum wage

how long can the immediate short run last?

Few days to a few months (depends on how long both input prices and output prices stay fixed)

What is the final effect for the downward slope of the aggregate demand curve?

Foreign purchases effect

What is the real balances effect?

Higher price level reduces the real value or purchasing power of accumulated savings balances. A higher price level erodes the purchasing power so the public is poorer in real terms and will reduce its spending. A higher price level-less consumption spending

How does demand pull inflation come into play in terms of shifting the AD curve and equilibrium real outpu?

If there is a positive determinant in demand that shift the curve to the right, the equilibrium will move from P1 to P2 moving an equilibrium to a higher price combination This is demand PULLING the price up (INFLATION) above full employment

What kind of time horizons does the Aggregate Demand and Aggregate Supply Model portray

Immediate Short Run, SHort Run, and the long run

What are the three time horizons in terms of aggregate supply?

Immediate short run-input prices as well as output prices are fixed Short run-input prices are fixed but output prices can vary Long run-input prices as well as output prices can vary

What are major impacts to improved productivity?

Improved technology, better trained personnel, improved forms of business enterprises and the reallocation of labor resources from lower productivity to higher productivity uses

What effect do an increase of taxes and subsidies have on aggregate supply?

Increases in subsidies shift the aggregate supply curve to the right, increases in taxes shifts the aggregate supply curve to the left

What is the key ingredient to per unit production costs?

Input Prices. Domestic resource Prices include; wages, labor supply, land and capital, supply of available land resources Prices of Imported Resource prices include; foreign resource prices, exchange rate fluctuations

What prices are stickier, input or output?

Input prices are stickier than output prices

What effects the change investment spending?

Interest rates expected returns, expected future business conditions, technology, degree of excess capacity, business taxes

What is the least stable component of aggregate demand?

Investment spending

What kind of spending does a higher interest rate curtail?

Investment spending and interest sensitive consumption spending

Why does the short run aggregate supply curve shift upward?

It indicates a direct or positive relationship between the price level and the amount of real output that firms will offer for sale.

What is the equilibrium real output?

It is the joint establishment of the price level and the level of the real GDP

When is the long run in terms of aggregate supply?

It is the time over which both inpt prices as well as outpu prices are flexible (when the short run ends)

What is the final determinant in aggregate supply?

Legal Institutional Environment

What are the two things that can change net exports?

National INcome Abroadrising national income encourages foreigners to buy ore products...exports rise Exchange rates-if u.s. dollars are less than a foreign currency deflated then foreigners can buy more U.S> products therefore next exports go up

What effects the change in net export spending

National Income abroad Exchange rates

What weakens the realized multiplier effect?

Price level flexibility

What is the second major determinant of aggregate supply?

Productivity The measue of the relationship between a nation's level of real output and the amount of resources used to produce that output.

What three effects of a price level change causes the Aggregate Demand curve to slope downward?

REAL BALANCES EFFECT INTEREST RATE EFFECT FOREIGN PURCHASES EFFECT

What does an increase in government regulation do to aggregate supply?

The more the regulations the more of an increase to per unit production costs (shift to the left)

What are the buyers that are included in Aggregate Demand?

The nation's households, businesses, government as well as the businesses households and government in other nations

What is the relationship between the price level (GDP Price Index) and the amount of real GDP demanded?

The relationship between the price level and GDP demanded is inverse or negative (as price level goes up, quantity demanded goes down)

What is the equation for productivity?

Total output/total inputs

What kind of price and output model is the Aggregate Demand and Aggregate Supply model?

Variable Price-Variable Output-it allows the price level and level of real GDP to change

What is the shape of the long run aggregate supply curve?

Vertical at the economy's full employment output

When does the short run start?

When output prices start becoming flexbile but the input prices are totally fixed or highly inflexible.

What is interest rate effect?

When the supply of money in the economy is fixed, and the price increases, consumers need more money for purchases. If consumers need more money, businesses need more money to meet their payroll A higher price increases the demand for money. This is the interest rate

Why don't the quantity supplied change when prices change?

With both input prices and output prices being flexible the economy will produce the full employment level , and they will chage profit leels just enough to produce exactly the full employment output level