question
Aggregate demand curve
answer
a curve that shows the relationship between the level of prices and the quantity of real GDP demanded
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AD Curve
answer
In Chap. 5 we calculated GDP using 2 different methods: Expenditure & Income.
What's the Expenditure equation to calculate GDP?
GDP = C + I + G + NX (AD equation)
We will use this equation for AD, because AD includes all desired spending by the economic sectors.
What's the Expenditure equation to calculate GDP?
GDP = C + I + G + NX (AD equation)
We will use this equation for AD, because AD includes all desired spending by the economic sectors.
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The aggregate demand curve slopes
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downward. - as the price level or average level of prices in the economy changes, so does the purchasing power of money
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What is the shape of the Aggregate Demand curve?
answer
AD is downward sloping.
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aggregate demand
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total of demand for goods and services in an entire economy.
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aggregate supply curve
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a curve that shows the relationship between the level of prices and the quantity of output supplied
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long-run aggregate supply curve
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a vertical aggregate supply curve that reflects the idea that in the long run, the output is determined solely by the factors of production and technology
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What will cause the Long-run Aggregate Supply to shift to the right?
answer
1. new technology
2. increase in resources
2. increase in resources
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What will cause the Long-run Aggregate Supply to shift to the left?
answer
1. destruction of technology
2. decrease in resources
2. decrease in resources
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short run in macroeconomics
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the period of time in which prices do not change or do not change very much - both formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in output, not prices
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According to Keynes, what is the difference between the short-run and long-run?
answer
In the short-run:
If the overall price level decreases,
wages and prices do not decrease immediately.
Also, if price level increases, wages & prices do not increase right away.
In the long-run:
* If the price level increases, then wages and prices also increase.
* If price level drops, then wages & prices drop.
Keynes argued that wages & prices were sticky.
* Sticky wages are downwardly inflexible.
* Sticky prices are downwardly inflexible.
If the overall price level decreases,
wages and prices do not decrease immediately.
Also, if price level increases, wages & prices do not increase right away.
In the long-run:
* If the price level increases, then wages and prices also increase.
* If price level drops, then wages & prices drop.
Keynes argued that wages & prices were sticky.
* Sticky wages are downwardly inflexible.
* Sticky prices are downwardly inflexible.
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autonomous consumption spending
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the part of consumption spending that does not depend on income
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consumption function
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the relationship between consumption spending and the level of income
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marginal propensity to consume (MPC)
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the fraction of additional income that is spent
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MPC
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additional Consumption / additional income
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MPC Tax Multiplier
answer
- MPC / (1-MPC)
If MPC = 0.9, then the tax multiplier is -9
(-0.9/(1-0.9) = -0.9/0.1 = -9/1).
If MPC = 0.9, then the tax multiplier is -9
(-0.9/(1-0.9) = -0.9/0.1 = -9/1).
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marginal propensity to save (MPS)
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The fraction of additional income that is saved
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MPS
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Additional savings / additional income
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Calculating the MPS and MPC. In one year, a consumer's income increases by $200 and her consumption increases by $40.
Her marginal propensity to consume is equal to ____.
Her marginal propensity to save is equal to ______.
Her marginal propensity to consume is equal to ____.
Her marginal propensity to save is equal to ______.
answer
.20; .80
1: 40/200=.20 - consume
2: 1-.20=.80 - save
1: 40/200=.20 - consume
2: 1-.20=.80 - save
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If the MPC is 0.6, the simple multiplier will be
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1/(1 - 0.6) = 1/(0.4) = 2.5
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There is a relationship between the marginal propensity to consume (MPC) and the size of the fiscal multiplier. The formula is:
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1/(1-X) = multiplier
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wealth effect
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the increase in spending that occurs because the real value of money increases when the price level falls
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factors that increase aggregate demand
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Decrease in taxes
Increase in government spending
Increase in the money supply
Increase in government spending
Increase in the money supply
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Factors that Decrease aggregate demand
answer
Increase in taxes
Decrease in government spending
Decrease in the money supply
Decrease in government spending
Decrease in the money supply
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stagflation
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a decrease in real output with increasing prices
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increasing wages and prices will shift the short-run aggregate supply curve ________ as the costs of inputs rise in the economy
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upward
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as long as the economy is producing at a level of output that exceeds potential output, there will be continuing competition for labor and raw materials that will lead to continuing increase in wages and prices
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as long as the economy is producing at a level of output that exceeds potential output, there will be continuing competition for labor and raw materials that will lead to continuing increase in wages and prices
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Disposable income
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income after taxes.
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Disposable income =
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consumption + saving
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MPC + MPS =
answer
1
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What is the relationship between Price Level & real GDP?
answer
positive
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What causes Short Run AS to shift to the left?
answer
Negative Supply Shock
-Increase in price of resource input.
-1973 & 1979 oil prices
-Increase in price of resource input.
-1973 & 1979 oil prices
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