question
One explanation for the negative slope of the aggregate demand curve is the "WEALTH EFFECT" (AKA the "real-balances" effect) What is this effect?
answer
As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines.
question
According to wealth effect, what happens as the price falls?
answer
Consumption spending increases.
question
Wealth effect vs. interest-rate effect
answer
1) After an increase in the aggregate price level, Jasper realizes that the $300 in his checking account can now only buy as many lattes as $200 would have bought a year ago. As a result, he decides to purchase fewer lattes.
(wealth effect)
2) Abe notices an increase in the aggregate price of goods during the three years he has been charting his costs. Due to the increase, he decides to use less of his money to finance investment spending for his business.
(interest-rate effect)
3) Micah decides to increase savings in order to finance the remodeling of his home rather than seek a loan.
(interest-rate effect)
4) Ivan notices a decrease in the aggregate price level of 10%, so he decides to spend more of his $3,500 in savings than he had originally planned to spend.
(wealth effect)
(wealth effect)
2) Abe notices an increase in the aggregate price of goods during the three years he has been charting his costs. Due to the increase, he decides to use less of his money to finance investment spending for his business.
(interest-rate effect)
3) Micah decides to increase savings in order to finance the remodeling of his home rather than seek a loan.
(interest-rate effect)
4) Ivan notices a decrease in the aggregate price level of 10%, so he decides to spend more of his $3,500 in savings than he had originally planned to spend.
(wealth effect)
question
Wealth
answer
Wealth = Assets - Debt
question
Decide whether there will be an increase, decrease, or no change in aggregate demand.
answer
1) The US government decides to increase the federal tax rate by 4% for all earners.
(Aggregate demand DECREASES)
2) The Federal Reserve, the agency charged with regulating banking and monetary policy in the US, decides to increase the amount of money available in the economy
(Aggregate demand INCREASES)
3) The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy
(Aggregate demand INCREASES)
4) A manufacturing boom during the late 1990's has created an oversupply of tractors, a necessary implement in agricultural production
(Aggregate demand DECREASES)
(Aggregate demand DECREASES)
2) The Federal Reserve, the agency charged with regulating banking and monetary policy in the US, decides to increase the amount of money available in the economy
(Aggregate demand INCREASES)
3) The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy
(Aggregate demand INCREASES)
4) A manufacturing boom during the late 1990's has created an oversupply of tractors, a necessary implement in agricultural production
(Aggregate demand DECREASES)
question
On 45 degree graph (#5)
When aggregate prices INCREASE, the aggregate spending curve will shift...
When aggregate prices INCREASE, the aggregate spending curve will shift...
answer
DOWNWARDS resulting in both a reduction in planned aggregate spending and a decrease in real GDP.
(#5 OneNote)
(#5 OneNote)
question
Although the economy is healthy, there is an increase in the natural rate of unemployment.
answer
Short-run Aggregate Supply Decreases
When the natural rate of unemployment increases, more workers are unemployed. Less labor makes it more expensive to produce so short-run aggregate supply will decrease or shift to the left.
When the natural rate of unemployment increases, more workers are unemployed. Less labor makes it more expensive to produce so short-run aggregate supply will decrease or shift to the left.
question
The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown
answer
Short-run Aggregate Supply Decreases
Similarly, the bad weather in the Northwest will reduce the availability of lumber and increase the price, making lumber more expensive at any amount. Because lumber is used extensively as an input into the production function, this too will result in a decrease in short-run aggregate supply.
Similarly, the bad weather in the Northwest will reduce the availability of lumber and increase the price, making lumber more expensive at any amount. Because lumber is used extensively as an input into the production function, this too will result in a decrease in short-run aggregate supply.
question
The production of a new type of blade for their combine harvesters, a tractor used to harvest crops, has allowed wheat farmers, like Herbert, to increase productivity by 40%
answer
Short-run Aggregate Supply Increases
a rise in productivity will result in an increase in short-run aggregate supply. Because of the new technology, it now becomes cheaper for Herbert, and the other farmers like him, to produce at any quantity, and so they increase production.
a rise in productivity will result in an increase in short-run aggregate supply. Because of the new technology, it now becomes cheaper for Herbert, and the other farmers like him, to produce at any quantity, and so they increase production.
question
Deflation
answer
refers to a decrease in aggregate price level. Represented by a movement down the short-run aggregate supply curve.
question
SRAS (short run aggregate supply) will shift if there is a change in nominal wages paid to workers.
answer
An Increase in the nominal wage results in a shift of the SRAS curve left/ upwards.
question
Demand Shock
answer
refers to any condition which shifts the aggregate demand curve, representing overall demand in an economy. A NEGATIVE shift moves the curve down and leftward while a POSITIVE shift will move the curve up and rightward.
question
After several weeks of economic instability, the Swedish stock market begins to quickly decline as consumers lose confidence in the economy.
answer
Negative demand shock
question
After several years of rapid growth, the housing market begins to lose value and consumers scale back their spending in response.
answer
Negative demand shock
question
The United States government passes a tax cut of 4% for all citizens, resulting in an increase in their disposable income.
answer
Positive demand shock
question
The British government institutes a new public housing program which aims to build 3 million new apartment units across the United Kingdom. The introduction of the program dramatically increases the government's demand for raw materials and building supplies.
answer
Positive demand shock
question
Following a period of sustained economic decline, major companies in both the automobile and textile industries in the United States begin to lay off workers and close factories, citing loss of confidence in the ability of the American government to properly manage the economy.
answer
Negative demand shock
question
Negative supply shock
answer
left/ upward movement of the SRAS along the aggregate demand curve.
Results in higher prices level and lower real GDP.
Results in higher prices level and lower real GDP.
question
Stagflation
answer
the situation caused by a negative supply shock.
it represents the combination of decreased real GDP and inflation (a rise in prices)
it represents the combination of decreased real GDP and inflation (a rise in prices)
question
John Maynard Keynes famously said: "in the long run, ___________"
answer
"we are all dead"
question
Keynes was an economist during the Great Depression. During the Great Depression there was:
answer
High unemployment and high deflation
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