Unit 3: Aggregate Supply and Demand Quiz

Change in Net Exports (X-M)

Exchange Rates (If the U.S. dollar depreciates relative to the euro...) National Income Compared to Abroad (If a major importer has a recession...) (If the U.S. has a recession...)

Foreign Trade Effect

When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to fall. (Xn Decreases) For example: If prices triple in the U.S. Canada will no longer buy U.S. goods causing quantity demanded of U.S. products to fall. So: price level increases, GDP demanded decreases

Aggregate Demand

all goods and services (real GDP) that buyers are willing and able to purchase at different price levels. The demand for everything by everyone in the U.S.

When we use aggregates, we combine

all prices and all quantities

Price level increases, Price level decreases

real GDP demanded decreases, real GDP demanded increases

An increase in spending shifts AD to the _______, and decrease in spending shifts AD to the _______

right, left

If consumer spending decreases, what will happen in the long-run

wages and costs decrease (opposite for short-run)

If consumer spending increases, what will happen in the long-run?

wages and costs increase (opposite for short-run)

If producers expect higher prices in the future, workers will demand higher _______ and _______ to increase. This will _______ AS

wages, costs, decrease

AS is the production of all _______ in the economy

firms

Aggregate Supply

the amount of goods and services (real GDP) that firms will produce in an economy at different price levels. The supply for everything by all firms.

Aggregate Demand is

the demand by consumers, businesses, investments, and foreign countries

Aggregate

"added all together"

Change in Government Spending

(Decrease in defense spending...) (Increase in public works programs...)

AD =

C + I + G + Xn

AD = GDP =

C + I + G + Xn

R.A.P.

Change in: Resource Prices, Actions of Government, and Productivity

What doesn't shift the AD Curve?

Changes in price level, which causes a moves along the curve

In a Recessionary Gap, Actual GDP is below potential _______

GDP

The Wealth Effect

Higher prices levels reduce the purchasing power of money. This decreases the quantity of expenditures. Lower price levels increase. For example: If the price level doubles, people are going to buy less stuff because they have less purchasing power. So: price level increases, GDP demanded decreases

Short-Run AS Example

If a firm currently makes 100 units that are sold for $1 each. The only cost is $80 of labor. How much is profit? $100 - $80 = $20. What happens in the SHORT-RUN if price level doubles? Now 100 units set for $2, $200 - $80 = $120 profit. With higher profits, the firm has incentive to increase production

Long-Run AS Example

If a firm has a Total Revenue of $100 and uses $80 of labor, profit is $20. What happens in the LONG-RUN if price level doubles? TR $200 - IN the LONG RUN, workers demand higher wages to match price. So labor costs double to $160. If REAL profit doesn't change the firm has no incentive to increase output (production)

Change in Consumer Spending

Increase in Disposable Income (Higher incomes...), Consumer Expectations (People fear a recession...), Household indebtedness (More consumer debt...), Taxes (Decrease in income taxes...)

Capital Stock

Machinery and tools purchased by business that increase their output

If an increase in consumption or government spending doesn't cause economic growth, what does?

Only investment cases growth since firms increase their capital stock

Inflationary Gap

Output is high and unemployment is less than NRU

Recessionary Gap

Output is low and unemployment is more than NRU

The _______ shifts outward since producers can make more

PPC

Change In Resource Prices

Prices of domestic and imported resources (increase in price of Canadian lumber...) (Decrease in price of Chinese steel) Supply Shocks (Negative Supply Shock...) (Positive Supply Shock...) Inflammatory Expectations (If people expect higher prices in the future...)

Change in Investment Spending

Real Interest Rates (Price of borrowing $) Future Business Expectations (High Expectations...) Productivity and Technology (New robots...) Business Taxes (Higher corporate taxes means...)

The economy can be in 1 of 3 places at a time:

Recessionary Gap, Full Employment, or Inflationary Gap

Aggregate Supply differentiates between _______ and _______, which have two different curves

Short-Run, Long-Run

Change in Actions of Government (NOT Government Spending)

Taxes on producers (Lower corporate taxes...) Subsidies for Domestic Producers (Lower subsidies for domestic farmers...) Government Regulation (EPA inspections required to operate a farm...)

Change in Productivity

Technology (Computer virus that destroys half the computers...) (The advent of a teleportation machine...)

Long-Run Aggregate Supply (Vertical supply curve)

Wages and Resource prices will increase as price levels increase

Short-Run Aggregate Supply (Normal looking supply curve)

Wages and Resource prices will not increase as price levels increase

Interest Rate Effect

When the prices level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment. For example: An increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business. So: price level decreases, GDP demanded increases.

Use the AD and AS model to show an economy at full _______ output

employment

In an Inflation Gap, Actual GDP is above our _______

potential

Inverse

the relationship between price level and real GDP