Macro Chapter 12

Short-run aggregate supply decreases when:

• Commodity prices rise • Nominal wages rise • Any other factors change that increase firms' costs of production • Productivity falls

Short-run aggregate supply

increases when producers increase the quantity of aggregate output they are willing to supply at any given price level.

The aggregate demand (AD) curve

negatively sloped since the aggregate price level is inversely related to the quantity of aggregate output demanded.

The short-run aggregate supply curve

positively sloped indicating thatas the aggregate price level increases, the quantity of aggregate outputsupplied increases in the short run. The reason the short-run aggregate supply curve is positively sloped isthat, as the aggregate price level increases and wages remain sticky, itbecomes more profitable for firms to supply more output.

The aggregate demand ( AD) curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

The aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied.

The nominal wage

the dollar amount of the wage paid. Nominal wages are assumed to be "sticky" or inflexible due to the fact that they are determined by either labor contracts or informal wage agreements that businesses are reluctant to change in response to short-runeconomic fluctuations.

The wealth effect of a change in the aggregate price level

the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' assets.

The interest rate effect of a change in the aggregate price level

the effect on investment spending and consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' and firms' money holdings.

Short-run aggregate supply increases when:

• Commodity prices fall • Nominal wages fall • Any other factors change that decrease firms' costs of production • Productivity rises

Fiscal policy

affects aggregate demand directly through government purchases, and indirectly through changes in taxes or government transfers.

Monetary policy

affects aggregate demand indirectly through changes in the interest rate.

Contractionary fiscal policies and contractionary monetary policies

cause aggregate demand to decrease, or shift to the left.

Expansionary fiscal policies and expansionary monetary policies

cause aggregate demand to increase, or shift to the right.

The short-run aggregate supply (SRAS) curve

curve shows therelationship between the aggregate price level and the quantity of aggregate output supplied thatexistsin the short run,the period when many production costs can be taken as fixed.

A decrease in short-run aggregate supply

demonstrated by a leftwardshift of the short-run aggregate supply curve.

An increase in short-run aggregate supply

demonstrated by a rightwardshift of the short-run aggregate supply curve.Short-run aggregate supply decreases when producers decrease thequantity of aggregate output they are willing to supply at any given pricelevel.

An increase in aggregate demand means that the quantity of aggregate output demanded increases at any given aggregate price level. An increase in aggregate demand is shown by the rightward shift of the aggregate demand curve. Aggregate demand increases when:

• Consumers and firms have optimistic expectations regarding the future • Households' wealth rises, due to reasons other than a decrease in the aggregate price level • Firms increase investment spending on physical capital

A decrease in aggregate demand means that the quantity of aggregate output demanded decreases at any given aggregate price level. A decrease in aggregate demand is shown by the leftward shift of the aggregate demand curve. Aggregate demand decreases when:

• Consumers and firms have pessimistic expectations regarding the future • Households' wealth decreases, for reasons other than an increase in the aggregate price level • Firms reduce investment spending on physical capital

There are two reasons for the negative slope of the aggregate demand curve:

• The wealth effect of a change in the aggregate price level—a higher aggregate price level reduces the purchasing power of households' wealth and reduces consumer spending. • The interest rate effect of a change in the aggregate price level—a higher aggregate price level reduces the purchasing power of households' and firms' money holdings, leading to a rise in interest rates and a fall in investment spending.