Chapter 11 Aggregate Supply

Classical economists

18th&19th century economists that Believed the economic downturns would fix themselves through market forces.

Contractory fiscal policy

A decrease in govt purchases: increase in net taxes.

In long run equilirium

Actual output must equal potential output

The expansionary gap is equal to

Actual short run output minus potential output

Expansionary fiscal policy

An increase in govt purchases: decrease in net taxes

Beneficial supply shock

Could lead to lower price levels

The situation In which actual output exceeds potential output

Creates pressure for inflation

Beneficial supply shocks don't include what?

Establishment of the OSHA

The expected price level is significant because

Firms and resource owners make agreements based on those expected price levels

Personal output is the amount produced when

Firms and workers expectations about the price levels are realized.

What types of unemployment can exsist in an economy that is at it's potential output

Frictional, seasonal and structural only.

Long run

In macro a period during which wage contracts and resource price agreements can be renigotiated

Fixed resource prices helps explain why firms

Increase output in the short run when the price level increases.

Businesses will cut back production if

Price level turns out to be lower than expected.

Aggregate supply reflects billions of production decisions made by

Resource suppliers and firms

Short run aggregate supply curves

Show the relation between the price level and the quantity of aggregate output firms supply...other things constant

Automatic stabilizers

Structural features of govt spending and taxation that reduce fluctuations in disposable income.

In constructing the short run aggregate supply curve, we define the short run as the period in which

The costs of some resources are fixed.

Nominal wage represents

The dollar value of the goods and services a worker can purchase in exchange for work time.

Potential output does NOT depend on

The number of consumers in the market

Real wage represents

The quantity of goods and services a worker can purchase in exchange for work time.