question
What does the model of aggregate demand and aggregate supply try to explain?
answer
Short run fluctuations in the economy, business cycles
question
what is aggregate demand?
answer
the demand for all goods and services at various price levels. basically the demand for U.S. production (real GDP)
question
what is aggregate supply?
answer
the supply of alll goods and services at various price levels. basically the supply for U.S. production (real GDP)
question
what are the three reasons aggregate demand slopes downward?
answer
1. wealth effect
2. interest rate effect
3. exchange rate effect
2. interest rate effect
3. exchange rate effect
question
what six factors shift the aggregate demand curve?
answer
-changes to consumption, investment, government spending, net exports, the money supply, and taxes
question
what shape is the long run aggregate supply curve?
answer
vertical at full production
question
explain why LRAS is vertical
answer
long run production capabilities of an economy depend on factors of production such as labor, human capital, technology, these factors are independent on price level.
question
what is the natural rate of output?
answer
the natural rate of output is considered to be full production, this is the level of output that corresponds to full employment, meaning that the economy is producing normal rates of output at the natural rate of unemployment
question
what factors shift the long run aggregate supply curve?
answer
changes in labor, capital, human capital, technology, any factor that make it possible to produce more output in the long run.
question
what shape is the short run aggregate supply curve?
answer
upward sloping
question
what factors shift the SRAS?
answer
the SRAS shifts when the LRAS shifts, when energy or labor prices change, and when price expectation changes
question
Using an AS/AD diagram, illustrate the effects of a fall in aggregate demanf
answer
y-axis = price level
x-axis = output (y)
LRAS = straight vertical line
SRAS = upward slope now
AD = downward slope shifting to the left
Effect on the short run:
output decreases, unemployment increases, price level decreases
x-axis = output (y)
LRAS = straight vertical line
SRAS = upward slope now
AD = downward slope shifting to the left
Effect on the short run:
output decreases, unemployment increases, price level decreases
question
Explain how the economy returns to the long run level of output.
answer
The SRAS will shift to the right as expectations change about the economy that the price level will fall
question
What happens in the long run, if the economy self adjusts, to:
Output?
Unemployment?
Price level?
Output?
Unemployment?
Price level?
answer
output returns to normal
unemployment returns to natural rate
price level falls even further
unemployment returns to natural rate
price level falls even further
question
What policies could the government use to stabilize the economy?
answer
the government can use fiscal policy and make changes to taxes of government spending or they can use monetary policy and make changes to the money supply
question
How would these policies work?
answer
a decrease in taxes, an increase in government spending, or an increase in the money supply will shift the AD curve back to the right
question
What happens in the long run, if the government uses policy, to:
Output?
Unemployment?
Price level?
Output?
Unemployment?
Price level?
answer
They ALL return to normal in the long run
question
Using an AS/AD diagram, illustrate the effects of an aggregate supply shock.
answer
SRAS shifts to the left
Effects:
output decreases, unemployment increases, price level increases
Effects:
output decreases, unemployment increases, price level increases
question
Explain how the economy returns to the long run level of output.
answer
The SRAS will shift to the right as expectations change about the economy that the price level will fall
question
What happens in the long run, if the economy self adjusts, to:
Output?
Unemployment?
Price level?
Output?
Unemployment?
Price level?
answer
They ALL return to normal
question
What policies could the government use to stabilize the economy during an aggregate supply shock?
answer
a decrease in taxes, an increase in government spending, or an increase in the money supply will shift the AD curve to the right
question
how would this work?
answer
by shifting the AD to the right the economy returns to full production level
question
What happens in the long run, if the government uses policy, to: Output? __Returns to normal________
Unemployment? __Returns to Natural Rate_____ Price level? __Rises further
Unemployment? __Returns to Natural Rate_____ Price level? __Rises further
answer
...
question
Aggregate Demand and Supply v. Demand and Supply
answer
Aggregate demand and supply are different from the demand and supply. Aggregate demand and supply are used to explain what determines the economy's real output and price level, while supply and demand explain what determines the output and price of a particular product. Supply and demand are limited to the quantity of a particular good or service demanded or supplied, but AD and AS expand so you must look at the total or aggregate quantity of all final goods and services demanded and supplied.
question
For each scenario, tell what is the initial impact on the AS-AD market
1. Consumers expect a recession
2. Expansionary fiscal policy
3. Money supply increase
4. Workers expect high future inflation and negotiate higher wages now
5. Oil prices fall
1. Consumers expect a recession
2. Expansionary fiscal policy
3. Money supply increase
4. Workers expect high future inflation and negotiate higher wages now
5. Oil prices fall
answer
1. AD left
2. AD right
3. AD right
4. SRAS left
5. SRAS right
2. AD right
3. AD right
4. SRAS left
5. SRAS right
question
Monetary sounds like money, so it is changes to the money supply. If you are fiscally responsible, you likely pay your taxes, so Fiscal policy is changing taxes and government spending
answer
...
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