Econ 101 McGraw Hill Ch 9 Aggregate Demand and Aggregate Supply

negative shock to aggregate demand

A change to one of the determinants of aggregate demand that causes a decrease in the aggregate quantity of real GDP demanded at every price level. Graphically, a negative shock is represented by a leftward shift of the aggregate demand curve.

positive shock to aggregate demand

A change to one of the determinants of aggregate demand that causes an increase in the aggregate quantity of real GDP demanded at every price level. Graphically, a positive shock is represented by a rightward shift of the aggregate demand curve.

negative shock to aggregate supply

A change to one of the determinants of aggregate supply that causes a decrease in the aggregate quantity of real GDP supplied at every price level. Graphically, a negative shock is represented by a leftward shift of the aggregate supply curve.

positive shock to aggregate supply

A change to one of the determinants of aggregate supply that causes an increase in the aggregate quantity of real GDP supplied at every price level. Graphically, a positive shock is represented by a rightward shift of the aggregate supply curve.

depreciation (of currency)

A decrease in the value, or price, of one currency relative to another.

inflation

A general increase in prices of goods and services.

long-run equilibrium

A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms.

aggregate demand (AD)

A schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level, all else held constant.

aggregate supply

A schedule or curve that represents the relationship between the quantity of real GDP supplied in the economy and the price level. Also called short-run aggregate supply.

short-run equilibrium

A short-run situation in which the aggregate quantity of real GDP demanded is equal to the aggregate quantity of real GDP supplied. Graphically, short-run equilibrium occurs where the aggregate demand and aggregate supply curves intersect.

sticky wages

A situation where wages do not adjust in the short run. If wages are sticky downward, workers are reluctant to accept a decrease in their wages, creating a flat labor supply curve at the current wage.

Which of the following will increase the aggregate demand curve? An increase in business taxes. A decrease in wages and other input prices. An increase in consumption spending. A decrease in the price of valuable commodities. An increase in investment.

An increase in consumption spending. An increase in investment.

increase in aggregate demand

An increase in the quantity of real GDP demanded in the economy at every price level; graphically, an increase in aggregate demand is represented by a rightward shift of the aggregate demand curve.

increase in aggregate supply

An increase in the quantity of real GDP supplied in the economy at every price level; graphically, an increase in aggregate supply is represented by a rightward shift of the aggregate supply curve.

appreciation (of currency)

An increase in the value, or price, of one currency relative to another.

cost-push inflation

Inflation that occurs due to a decrease in aggregate supply.

demand-pull inflation

Inflation that occurs due to an increase in aggregate demand.

interest-rate effect

One of the three reasons that aggregate demand is downward-sloping: When the price level rises, the demand for money increases, which causes interest rates to rise, resulting in a decrease in investment and consumption spending, thus reducing the aggregate quantity of real GDP demanded.

foreign-purchases effect

One of the three reasons that aggregate demand is downward-sloping: When the price level rises, the quantity of exports decreases and the quantity of imports increases, resulting in a decrease in net exports, thus reducing the aggregate quantity of real GDP demanded.

real-balances effect

One of the three reasons that aggregate demand is downward-sloping: When the price level rises, the real value of savings falls and people are less willing or able to buy goods and services, thus reducing the aggregate quantity of real GDP demanded.

Which of the following are the three broad categories of the determinants of aggregate supply?

Productivity, Resource prices, Social institutions

quantity of real GDP demanded

The aggregate quantity of output (real GDP) demanded at a given price level. Sometimes referred to simply as output.

Phillips curve

The downward-sloping line that represents the negative, or inverse, relationship between the rate of inflation and the unemployment rate in the short run.

income effect

The effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources.

substitution effect

The effect that a change in the price of one good, service, or resource has on the demand for another. For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa.

sticky resource prices

The idea that resource prices tend to adjust slowly (be "sticky") in response to changes in the market.

flexible prices

The idea that, in the long run, resource prices are able to fully adjust to changes in the market.

autonomous consumption (A)

The level of consumption expenditure when income is equal to zero. Autonomous consumption is funded by drawing on savings or by borrowing.

full-employment real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also, the level of real GDP when the economy is in a long-run equilibrium.

diminishing marginal utility

The negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time.

resource price

The price paid for, or opportunity cost of, using a resource such as land, labor, capital, or entrepreneurial ability.

exchange rate

The rate, or price, at which one currency can be exchanged for another.

long-run aggregate supply (LRAS)

The relationship between real GDP and the price level when all input prices are flexible. LRAS is represented graphically as a vertical line at the full-employment level of real GDP, Y*.

business cycle

The short-term fluctuations experienced in the economy due to changes in levels of economic activity.

aggregate expenditures (AE)

The sum of all expenditures made in an economy on consumption, gross investment, government purchases, and net exports. In equilibrium, aggregate expenditures equals income, or real GDP.

long run

The time period in which all inputs of production can be changed.

short run

The time period in which at least one input of production is fixed, but other inputs can be changed.

stagflation

When an economy simultaneously experiences both rising unemployment (a stagnating economy) and rising prices (inflation).

Price level increasing, causing a movement along the aggregate demand curve, can be explained by:

a decrease in net exports. (As a result of the foreign-purchases effect, an increase in the price level causes the quantity of exports to decrease and the quantity of imports to increases, which means net exports decreases and the aggregate quantity of real GDP demanded decreases.)

The equilibrium price level and real GDP are determined by the intersection of the:

aggregate demand and short-run aggregate supply curves.

Along the short-run aggregate supply curve

as price level increases the level of real GDP supplied also increases.

When there is a negative demand shock, real GDP lies ____the full-employment level and unemployment is ____ than the natural rate.

below, higher

When the dollar depreciates, foreign goods and services become more expensive to U.S. consumers and imports __

decrease

When aggregate ____decreases, there is lower inflation and higher unemployment.

demand

When there is a negative demand shock, real GDP falls below the ___employment level and unemployment is higher than the _____ rate.

full, natural

When aggregate demand decreases, there is_____inflation and ____ unemployment.

less, more

The _____ aggregate supply curve is a vertical line originating at the full-employment level of real GDP.

long

Aggregate demand illustrates a(n) ___ relationship between the price level and the quantity of real GDP or output demanded.

negative

The short-run equilibrium level of real GDP is:

not necessarily the full-employment level of output that is consistent with the long run.

In the short run, an increase in the ___level will increase the quantity of real GDP supplied.

price

In the short run, an increase in the ________ will increase the quantity of real GDP supplied.

price level

As nominal wages and the costs of other resources fall during a recession, aggregate supply shifts to the

right

Suppose there is a negative supply shock. In the long run wages and production costs:

rise the short-run aggregate supply curve to shift to the left; the price level rises; real GDP falls and eventually the economy returns to its full-employment level of real GDP.

Changes in consumption and gross investment can:

shift the aggregate demand curve.

In the ___ run, input prices are fixed and do not adjust along with other prices in the economy.

short

The short-run aggregate___curve slopes upward because input prices are sticky.

supply

The determination of the the long-run equilibrium price level and real GDP is found by using:

the long-run aggregate supply curve.

The aggregate demand and supply model can be used:

to describe changes in an economy's price level and real GDP in the short and the long run.