Chapter 12: Macroeconomics

Determinants of AD

Consumer *consumer confidence (expectation,wealth, income, taxes, interest rate) Government * Chapter 13 Investment *interest rate, business expectations (increase AD shift right), RGDP, taxes Net Exports *foreign exchange increases when the power of the dollar changes (when countries buy more: income of trading partners, this shifts AD to the right)

Aggregate Demand

Demand for all the products Axis: Real GDP, and Price

Foreign Purchases Effect

Foreigners buy more when our price level decreases

AD/AS Model

Purpose of AD/AS: Once you know where full employment is...you can compare actual and potential *showing 3 states of the economy

Menu Costs

The cost to a firm resulting from changing its prices. The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the costs of changing nominal prices in general.

Productivity

The effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input.

Aggregate Supply

at some point even though prices are increasing, and you would want to make more..you are limited, you cannot go on infinitely (reason why it is concave)

Long Run AS

In order for an economy's LRAS curve to shift, the economy must grow or contract. Recall that economic growth is also described in the Production Possibilities Curve. The determinants that shift the PP Curve are the same determinants that shift the LRAS. These determinants are the following: Size of the Labor Force Quantity/Quality of Capital Quantity/Quality of Resources Technology Health Education

Interest Rate effect

Inflation goes up, Higher interest, less spending

Determinants of AS

Input prices (land, labor, capital, entrepreneurship) *prices of resources, cost of production Advances in Technology/ Innovation (supply shock) —> shifts to right Taxes and regulations —> shift to the left *subsidy would increase

Equilibrium Real Output

The point at which aggregate expenditures equal real domestic output. -

Equilibrium Price Level

The price level at which the aggregate demand and aggregate supply curves intersect. At each point along the AD curve, both the money market and the goods market are in equilibrium. Each point on the AS curve represents the price/ output decisions of all the firms in the economy.

Efficiency Wages

Wages that are higher than the market equilibrium. Firms that pay efficiency wages could lower their wages and hire more workers, but choose not to do so. Some reasons that managers might choose to pay efficiency wages are to avoid shirking, reduce turnover, and attract productive employees.

Short-Run AS

When the long run aggregate supply in an economy shifts, the short run aggregate supply shifts in the same direction. Therefore, any determinant that shifts the LRAS curve also shifts the SRAS curve in the same direction. Furthermore, the following determinants also shift the SRAS curve: Business costs - As we saw in the basic supply and demand graphs, business costs directly affect supply. When costs of production increase, businesses cut back on production and supply less. Thus, when business costs increase, short run aggregate supply decreases and shifts to the left. Business taxes - Similar to business costs, business taxes directly affect supply. When taxes increase, businesses lose revenue and profit less from sales. Businesses will choose to supply less when taxes are high in order to save supply for later times when profit can be higher. Thus, an increase in business taxes leads to a decrease in short run aggregate supply. Business regulations - Regulations cause businesses to move and produce at slower rates as there become more "hoops" to jump through. More government requirements must be satisfied and production is slowed down. An increase in business regulations leads to a decrease in production and the short run aggregate supply curve.

Real Balances Effect

Your money goes further, as prices go down (you don't have more in your pocket) ... The stimulation of output and employment caused by increasing consumption due to a rise in real balances of wealth, particularly during deflation.