macroeconomics chap 12

interest rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases). in response to increase in aggregate price level the public tries to increase its money holdings by borrowing more or selling assets, this reduces the funds availible for borrowers which increases interest rates rise in interest rates reduces investment spending (I) because cost of borrowing is higher

Government policies and Aggregate demand

Through fiscal and monitary policy the govenment can change the economic performance of the country

17. The short-run aggregate supply curve has a positive slope, showing that increases in the price level will increase the quantity of aggregate output supplied by firms. False True

True

1 review

aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded

8. Aggregate demand will shift to the RIGHT if: government purchases increase. the aggregate price level increases. the money supply shrinks. taxes go up.

government purchases increase.

7 review

in the long run all prices including nonomal wages are flexable and the economy produces at its potential output. if actual aggregate output exceeds potential output, nominal wages will eventually rise in responce to low unemployment and aggregate output will fall.If potential output exceeds actual aggregate output then nominal wages will eventually fall in responce to high unemloyment and aggregate output will rise . so long run aggregate supply curve is verticle at potential output

16. The long run in macroeconomic analysis is a period: in which the capital stock is held constant. in which wages and some other prices are sticky. in which prices and nominal wages are flexible. longer than one year.

in which prices and nominal wages are flexible.

2. A decrease in energy prices will: decrease aggregate demand. decrease short-run aggregate supply. increase short-run aggregate supply. decrease the quantity of aggregate output supplied in the short run.

increase short-run aggregate supply.

changes in wealth

increase spending there was a rise in stock market that increased aggregate demand

19. Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a: movement downward. shift to the right. movement upward. shift to the left.

shift to the left.

13. The _____ curve shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied when wages and prices are not fully flexible. long-run aggregate supply aggregate spending short-run aggregate supply aggregate demand

short-run aggregate supply

11. A natural disaster that destroys part of a country's infrastructure is a type of negative _____ shock and therefore shifts the _____ curve to the _____. demand; aggregate demand; right supply; aggregate demand; left demand; long-run aggregate supply; left supply; short-run aggregate supply; left

supply; short-run aggregate supply; left

2 review

the aggregate demand curve is both downward sloping for two reasons, the wealth effect of a change in the aggregate price level--a higher aggregate price level reduced 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 puchasing power of households firms money holdings. leading to a rise in interest rates and a fall in investment spending and consumer spending

AD-AS model

the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations

5 review

the short-run aggregate supply curve is upward sloping because nominal wages are sticky in the short run: a higher aggregate price level leads to higher profit per unit of output and increased aggregate output in the short run

changes in productivity

using barcode scanners increased profit and increase aggregate supply

14. The long-run aggregate supply curve is: vertical. upward sloping. downward sloping. horizontal.

vertical.

short-run macroeconomic equilibrium

when the quantity of aggregate output supplied is equal to the quantity demanded

competitive market

production cost per unit doesn't necessarily rise for the same proportion as rise in price

15. The _____ curve shows the negative relationship between the aggregate price level and the quantity of aggregate output demanded in the economy. investment demand aggregate demand long-run aggregate supply short-run aggregate supply

aggregate demand

12. The long-run aggregate supply curve is vertical because in the long run: technological progress outpaces raises in nominal wages. all prices are flexible. all factors of production increase. the price of labor is flexible, while the price of physical capital is fixed.

all prices are flexible.

sticky wage theory

an unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services

Why is the aggregate demand curve downward sloping?

GDP= C + I + G + X - IM demand curve is different because demanded quantity depends on the price of the good, holding prices of other goods and services constant. -in the demand curve it the demand changes when quantity of a good demanded falls when we move up the curve aka people switch to other things aggregate reflects changes in the prices of all final goods and services these two reasons -the weath effect -the interest rate effect

Monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. rise in aggregate price levels reduces the purchasing power of the money holdings, causing a rise in interest rate reducing investment spending and consumer spending the quantity of money in central banks is deterined by the central banks when the central bank increases money supply the people have more money and are willing to lend it out in order to drive down the interest rate at and given aggregate price level leading to higher investment and consumer spending increasing the quantity of money shifts it to the right increasing the money supply slowly, increased the aggregate price level which increased purchasing power of the money in circulation fell led to an incrase in demand for borrowing and a surge in interest rates which decreases agregate demand

Changes in commodity prices

If commodity prices fall, short-run aggregate supply increases. If commodity prices rise, short-run aggregate supply decreases. commodities are not a final good so they are not captured in the short run aggregate supply curve already they have large impacts on production costs

Changes in expectations

If consumers and firms become more optimistic, aggregate demand increases If consumers and firms become more pessimistic, aggregate demand decreases

Shifts in aggregate demand curve

More money = right, less money = left Changes in expectations Changes in wealth Fiscal Policy Monetary Policy Size of existing physical stock (more now = less investment/production)

. Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? Choose the correct statement. The short-run aggregate supply curve is upward-sloping because in the short run wages are flexible. The long-run aggregate supply curve is vertical because in the long run wages are sticky. The short-run aggregate supply curve is upward-sloping because in the short run wages are sticky. The long-run aggregate supply curve is vertical because in the long run wages are flexible. Correct! The short-run aggregate supply curve slopes upward because nominal wages are sticky in the short run. Nominal wages are fixed by either formal contracts or informal agreements in the short run. So, as the aggregate price level falls and nominal wages remain the same, production costs will not fall by the same proportion as the aggregate price level. This will reduce profit per unit of output, leading producers to reduce output in the short run. However, in the long run, nominal wages can and will be renegotiated. Nominal wages will change along with the aggregate price level. As the aggregate price level rises, production costs will rise by the same proportion. For more help, see section Aggregate Supply. The short-run aggregate supply curve is upward-sloping because in the short run wages are sticky. The long-run aggregate supply curve is vertical because in the long run wages are also sticky.

The short-run aggregate supply curve is upward-sloping because in the short run wages are sticky. The long-run aggregate supply curve is vertical because in the long run wages are flexible.

factors that shift aggregate demand to the left

When consumers and firms become more pessimisitc when the real value of houses decrease when the exisiting stock of capital is realitivly large when the government reduces spending or raises taxes when the central bank reduces the quantity of money

aggregate supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level 1929 fall in aggregate demand cause -reduction of quantity of goods at every price --fall in prices --gdp deflator was below its level --decline in output of most goods --surge in unemployment rate us economy moved down its aggregate supply curve

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

Shifts of the Short-Run Aggregate Supply Curve

changes in commodity prices, changes in nominal wages, changes in productivity increases when producers increase the quantity of aggregate output at any given price level increases if the production costs lower

6 review

changes in commodity prices, nominal wages and productivity lead to changes in producers profits and shift in the short-run aggregate supply curve

the aggregate demand curve and the income-expenditure model

derived from the income expenditure model equal to consumer spending plus investment spending fall in aggregate price level will cause the ae(planned) curve to shift

From the Short Run to the Long Run

economy produces more or less than the potential output the economy leaves the long run curve when it goes onto short run curve by deviating from the path

7. In the long run, changes in the aggregate price level will be accompanied by _____ proportional changes in input prices. more than equal opposite less than

equal

Size of the existing stock of physical capital

if a company has a lot of things they will be less likely to spend money to get more

20. In the long run, the aggregate price level has: a negative effect on the quantity of aggregate output. no effect on the quantity of aggregate output. a positive effect on the quantity of aggregate output. an effect on aggregate output but none on employment.

no effect on the quantity of aggregate output.

sticky wages

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

3. The intersection of an economy's aggregate demand and long-run aggregate supply curves: occurs at the economy's potential output in long-run equilibrium. determines its equilibrium real GDP in both the long run and the short run. occurs at high levels of cyclical unemployment. determines its equilibrium price level in both the long run and the short run.

occurs at the economy's potential output in long-run equilibrium.

10. The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called: structural GDP. potential GDP. Keynesian GDP. real GDP.

potential GDP.

1. The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate: productivity. unemployment rate. quantity of output demanded by households, businesses, the government, and the rest of the world. quantity of output demanded by businesses only.

quantity of output demanded by households, businesses, the government, and the rest of the world.

short-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

short-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed must ask question is it profitable to produce a unit of output? profit per unity of output= price per unit of output - production cost per unit of output biggest cost is wages

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible changes in the aggregate price level will in the long run e accompanied by equal proportional changes in all input prices including nominal wages long run aggregregate supply curve is verticle because changes in aggregate price level have no impact on aggregate output in the long run

9. In the short run, wages and some prices are considered to be: unpredictable. irrelevant. extremely flexible. sticky.

sticky.

8 Review

the AD-AS model, the intersection of the short-run aggregate supply curve and the aggregate demand curve is te point of short-run macroeconomic equilibrium. It determines the short run equilibrium price level and the level of short-run equilibrium aggregate output.

pricing power

the ability to escape price competition and to justify higher prices and margins without losing market share

3 review

the aggregate price curve shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level and the effect of the size of the existing stock of physical capital. Policy makers can use fiscal policy to shift the aggregate demand curve.

4 review

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

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 assests if the aggregate price level increases then people will buy less because it cost more to buy things because of this (C) falls when aggreate price level rises leading to downward slope of the curve

changes in nominal wages

the increase or decrease of nominal wages will impact the fall through production costs

potential output

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible defines the trend around which actual aggregate output fluctuates from year to year

Fiscal policy

the use of government spending and revenue collection to influence the economy effect of this is direct because it influenes the G part of the equation a good example is ww2 where federal purchases exceeded 400% usually used in order to break out of depressions changes in tax rates indirectly change the effect of disposable income

nominal wage

the wage measured in current dollars; the dollar amount on a paycheck

18. The short-run aggregate supply curve is: upward sloping. downward sloping. horizontal. vertical.

upward sloping.

6. Because the aggregate price level has no effect on aggregate output in the long run, the long-run aggregate supply curve is: vertical. upward sloping. downward sloping. horizontal.

vertical.

factors that shift aggregate demand increases in quantity

when consumers become more optimistic their aggregate demand increases when the real value of household assets rise when the existing stock of physical capital is relatively small when the government increases spending or cuts taxes when the central bank increases the quantity of money