Economics Chapter 33: Aggregate Demand and Aggregate Supply
What is the 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.
What is the sticky-price theory?
the prices of some goods and services adjust sluggishly to changes in economic conditions because of menu costs. an unexpected drop in prices leaves firms with higher than desired prices, causing the production to fall.
What is the 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.
When is the classical theory of dichotomy untrue?
the short run
why might the short-run aggregate supply curve shift?
All the things that affect the long-run aggregate supply curve as well as the price level that people expect to prevail. 1. Changes in labor, capital, natural resources, or technological knowledge. 2. When people change their expectations of the price level, it shifts the short run aggregate supply curve (because of the sticky wage, price, and misperceptions)
What are the three theories as to why the aggregate-supply curve slope upward?
1 sticky wage theory 2. sticky price theory 3. the misperceptions theory
Why might the aggregate demand curve shift?
1. Changes in consumption (any event that changes how people want to consume) less consumption shifts the curve left. 2. changes in investment (more investment = more demand) 3. changes in government purchases 4. changes in net exports Basically anything where more goods and services are demanded shifts the curve to the right.
What are the 3 facts about economic fluctuations?
1. Economic fluctuations are irregular and unpredictable 2. Most macroeconomic quantities fluctuate together 3. As output falls, unemployment rises
What are the reasons that the aggregate demand curve slopes downward?
1. The wealth effect 2. The interest-rate effect 3. The exchange-rate effect
What usually happens during times of increasing GDP?
1. consumer spending increases 2. unemployment declines 3. home sales increase 4. industrial production increase 5. retail sales increase
What are the three important lessons about shifts in aggregate demand?
1. in the short run, shifts in aggregate demand cause fluctuations in the economy's output of goods and services. 2. In the long run, shifts in aggregate demand affect the overall price level but do not affect output. 3. Because policymakers influence aggregate demand, they can potentially mitigate the severity of economic fluctuations.
What is the wealth effect?
A decrease in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more. The increase in consumer spending means a larger quantity of goods and services demanded. And vice versa.
What is the interest-rate effect?
A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increase the quantity of goods and services demanded. and vice versa
What is a depression?
A period of falling incomes and rising unemployment that is more severe.
What is a recession?
A period of falling incomes and rising unemployment that is relatively mild.
What is stagflation?
A period of falling output and rising prices.
How does an increase in the expected price level affect aggregate supply?
An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the left.
Why might the long run aggregate supply curve shift?
Any change in the natural level of output shifts the long-run aggregate supply curve. 1. changes in labor 2. changes in capital 3. changes in natural resources 4. changes is technological knowledge
Why is the long-run aggregate supply curve vertical?
Because an economy's production of goods and services (its real GDP) depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services. Therefore, the price level doesn't affect the aggregate supply curve.
What happens to the aggregate demand curve when the price level drops?
The aggregate demand curve shifts to the right.
What happens when the short run aggregate supply curve shifts to the left in the short run?
The price rises and the output falls. This is stagflation.
What is the exchange-rate effect?
When a fall in the U.S. price level causes U.S. interest rates to fall, the real value of the dollar declines in foreign exchange markets. This depreciation stimulates the U.S. net exports and thereby increase the quantity of goods and services demanded.
What is the aggregate supply curve?
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.
What is the misperceptions theory?
changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output.
What is the model of aggregate demand and aggregate supply used to examine?
examine the economy's short run fluctuations around the long-run output level.
Why does the aggregate supply curve slope upward in the short run?
in the short run, the price level does effect the level of output. The quantity of output supplied deviates from its long-run or natural, level when the actual price level in the economy deviates from the price level that people expected to prevail.
are short term fluctuations in the GDP predictable and regular?
no
What is the sticky wage theory?
nominal wages are slow to adjust to changing economic conditions. The stickiness of wages gives firms an incentive to produce less output when the price level turns out lower than expected and to produce more when the price level turns out higher than expected.
What is the business cycle?
short run fluctuations in real GDP