[Ch.16] Aggregate Supply and Aggregate Demand

What would not shift the aggregate demand curve

A change in technology

Recession

A sustained decline in economic activity

Expansion

A sustained improvement in economic activity

Business Cycle

A wave of economic activity comprised of an expansion and a recession

What would not shift the aggregate supply curve

An increase in the price level

Business Cycles

Are each comprised of a recession and an expansion

Recessions

Are marked by a sustained decline in output

What would shift the aggregate demand curve to the left

Business firms reduce spending on plant and equipment

Keynes

Explained the cause of and cure for the Great Depression

According to the interest rate effect, aggregate demand slopes downward because lower prices

Reduce interest rates and therefore increase the quantity demanded in aggregate

An increase in the price level

Reduces real financial wealth and therefore decreases consumer demand

Equilibrium Quantity

The amount of output that results in no shortage or surplus, the amount of goods and service bought and sold in the economy

Potential GDP

The amount that can be produced when all of the economy;s resources are used fully and effectively

Aggregate Demand

The demand for all goods and services by all households, businesses, governments, and foreigners

What will happen to the equilibrium price level and the equilibrium quantity of output if consumer confidence increases? Assume upward-sloping aggregate supply curve

The equilibrium price level and quantity of output increase

What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume an upward-sloping aggregate supply

The equilibrium price level and quantity of output increase

What will happen to the equilibrium price level and the equilibrium quantity of output if a major earthquake destroys much of the plant and equipment on the West Coast? Assume an upward-sloping aggregate supply curve

The equilibrium price level increases while the equilibrium quantity of output decreases

What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate supply curve shifts to the left? Assume a long-run aggregate supply curve

The equilibrium price level increases while the equilibrium quantity of output decreases

What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate supply curve shifts to the left? Assume an upward-sloping aggregate supply curve

The equilibrium price level increases while the equilibrium quantity of output decreases

What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume a long-run aggregate supply curve

The equilibrium price level increases while the equilibrium quantity of output remains unchanged

Classical Economic Theory

The predominant paradigm in economic analysis from about 1800 until 1930, based on Say's Law

Equilibrium Price Level

The price level that equates aggregate supply and aggregate demand, the average level of prices in the economy

Aggregate Supply

The supply of all goods and services by all producers in the economy

Say's Law`

Theory that supply creates its own demand Basis of Classical economic analysis