Principles of Macro Chapter 10: Dynamic change, economic fluctuations, and the AD-AS model

List the factors that decrease aggregate demand

1. a decrease in real wealth 2. an increase in the real interest rate 3. an increase in the pessimism of businesses and consumers about future economic conditions 4. a decline in the expected rate of inflation 5. lower incomes abroad 6. an increase in the exchange rate value of the nation's currency

List the factors that increase short-run aggregate supply

1. a decrease in resource prices-hence, production costs 2. a reduction in expected inflation 3. favorable supply shocks, such as good weather or a reduction in the world price of key imported resources

List the factors that increase aggregate demand

1. an increase in real wealth 2. a decrease in the real interest rate 3. an increase in the optimism of businesses and consumers about future economic conditions 4. an increase in the expected rate of inflation 5. higher real incomes abroad 6. a reduction in the exchange rate value of the nation's currency

List the factors that decrease short-run aggregate supply

1. an increase in resource prices-hence, production costs 2. an increase in expected inflation 3. unfavorable supply shocks, such as bad weather or an increase in the world price of a key imported resource

List the factors that decrease long -run aggregate supply

1. decrease in the supply of resources 2. deterioration in technology and productivity 3. institutional changes that reduce efficiency of resource use

List the factors that increase long-run aggregate supply

1. increase in the supply of resources 2. improvement in technology and productivity 3. institutional changes that increase efficiency of resource use

Choose one factor that decreases aggregate demand. Describe the process in which the economy will return to long-run equilibrium

A decrease in wealth and therefor investment 1. Firms will decrease production (move along SRAS) -actual output < potential output -actual unemployment > natural rate 2. Resource prices will begin to fall 3. Interest rates will fall as demand for loanable funds decreases 4. Foreigners will purchase fewer US assets; the dollar will depreciate 5. SRAS will begin to rise (shift right) and consumers will buy more (move along AD) 6. The economy will return to long run equilibrium

Supply Shock

is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general price level.

Productivity

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

What are the two forces that underlie the self-correcting mechanism:

1. Interest rate changes -Higher (lower) interest rates cause less (more) consumption and investment 2. Resource price changes redirect production -Higher (lower) resource prices in one market will lower (raise) production there and increase (decrease) production elsewhere

Choose one factor that increases aggregate demand. Describe the process in which the economy will return to long-run equilibrium

An increase in wealth and therefor investment 1. Firms will increase production (move along SRAS) -Actual output > potential ouput -actual unemployment < natural rate 2. Resource prices will begin to rise 3. Interest rates will rise as demand for loanable funds increases 4. Foreigners will purchase more US assets; the dollar will appreciate 5. SRAS will began to fall (shift left) and consumers will buy less (move along AD) 6. The economy will return to long run equilibrium