Macroeconomics Chapter 12

Immediate-short-run aggregate supply curve

Assumes that both input prices and output prices are fixed resulting in a horizontal line at the current price level

RIght shits of aggregate demand

Increases of aggregate demand to the right of the fill-employment output cause Inflation and positive GDP gaps where actual GDP exceeds potential GDP

Right Shift of Aggregate supply Curve

Large improvements in productivity

Aggregate demand and supply curves depend on

Real GDP and Price Level

Left shifts of aggregate demand curve

Shifts of the aggregate demand curve to the left of the full-employment cause recession, negative gdp gaps and cyclical unemployment

Changes in aggregate demand factors

alter the spending by these groups and shift the aggregate demand curve. The extent of the shift is determined by the size of the initial change in spending and the economy's multiplier

The foreign purchases effect suggests that

an increase in one country's price level relative to the price levels in other countries reduced the net export component of that nation's aggregate demand

Long-run aggregate supply curve

assumes that nominal wages and other input prices fully match any change in the price level. The curve is vertical at full-employment output

Determinants of aggregate supply

input prices, productivity, and the legal-institutional environment. A change in these factors changes the input price level and therefore will shift the aggregate supply curve

Intersection of demand and supply curves

is equilibrium price level and real GDP

Short-run aggregate supply curve assumes

nominal wages and other input prices remain fixed while output prices vary. THe curve is generally up-sloping because per-unit production costs and prices rise

Left Shifts of Aggregate supply

reflect increases in per-unit production costs and cause cost-push inflation with accompanying negative GDP gaps

Aggregate Supply Curve shows

shows the levels of real output that businesses will produce at various price levels

Determinants of aggregate demand:

spending by domestic consumers, by businesses, by government and by foreign buyers

The real-balances effect indicates

that inflation reduces the real value or purchasing power of fixed value financial assets causing cut-backs in consumer spending

Aggregate demand curve shows

the level of real output that the economy demands at each price level

Aggregate demand curve is downsloping because

the real-balances effect, the interest-rate effect, and the foreign purchases effect

interest-rate effect means that

with a specific supply of money, a higher price level increases the demand for money, thereby raising the interest rate and reducing investment purchases