question
Who proposed the idea of Aggregate Demand and Aggregate Supply?
answer
John Maynard Canes
question
"Aggregate" =
answer
= BIG PICTURE
question
In the long run, how much does the average real GDP grow?
answer
3%
question
Recessions
answer
periods of falling real incomes and rising unemployment
-negative real GDP for 2 consecutive quarters
-negative real GDP for 2 consecutive quarters
question
Depressions
answer
severe recessions
-(very rare)
-(very rare)
question
Business Cycle
answer
Short-run economic fluctuations
question
Are economic fluctuations regular or irregular?
answer
Irregular
question
Are economic fluctuations predictable or unpredictable?
answer
Unpredictable
question
Do most macroeconomic quantities fluctuate together or separate?
answer
Together
question
As output falls, does unemployment rise or fall?
answer
Rises
question
What is the biggest component of GDP?
answer
Consumption
question
What is the most volatile component of GDP?
answer
Investment
question
Are recessions small or big dips in GDP?
answer
Small dips
question
Model of Aggregate Demand and Aggregate Supply
answer
-used to explain the short run
-study fluctuations
-study fluctuations
question
What theories do economists use to explain the long run?
answer
Classical Economic Theories
question
Classical Dichotomy
answer
the separation of variables into two groups: REAL and NOMINAL
question
Real
answer
quantities and relative prices
question
Nominal
answer
measured in terms of money
question
Neutrality of Money
answer
changes in the money supply affect nominal variables, but not real variables
question
Does the classical theory describe the long run or short run?
answer
Long Run
question
Can changes in nominal variable affect real variables in the short run?
answer
Yes
question
Can changes in nominal variable affect real variables in the long run?
answer
No
question
What does the Model of Aggregate Demand and Aggregate Supply determine?
answer
The eq'm price level and the eq'm output (real GDP)
question
In the Model of Aggregate Demand and Aggregate Supply, what variable is on the x-axis?
answer
Real GDP (Y)
(quantity of output)
(quantity of output)
question
In the Model of Aggregate Demand and Aggregate Supply, what variable is on the y-axis?
answer
Price Level (P)
question
What does the Aggregate-Demand (AD) Curve show?
answer
The quantity of all g&s demanded in the economy at any given price level
question
What variables does a change in Price Level affect?
answer
C, I, and NX
question
Does a change in Quantity Demanded shift the demand curve or move along the demand curve?
answer
Movement along the demand curve
question
The Wealth Effect
answer
Increase in the market value of these assets induces a feeling of being 'richer' in their owners (even if no additional cash is realized) and often tends to encourage spending and to dampen savings
-As P rises, the $ people hold buy fewer g&s, so real wealth is lower-->people feel poorer-->consumption falls
-If prices fall, consumption rises
-If prices rise, consumption falls
-As P rises, the $ people hold buy fewer g&s, so real wealth is lower-->people feel poorer-->consumption falls
-If prices fall, consumption rises
-If prices rise, consumption falls
question
What variables are apart of the Wealth Effect?
answer
P & C
(price & consumption)
(price & consumption)
question
The Interest Rate Effect
answer
-If P rises, g&s requires more $-->to get these $, people sell bonds or other assets-->this drives up interest rates-->Investment falls
-(if prices rise) If interest rates rise, investment falls
-(if prices fall) If interest rates fall, investment rises
-(if prices rise) If interest rates rise, investment falls
-(if prices fall) If interest rates fall, investment rises
question
What variables are apart of the Interest Rate Effect?
answer
P & I
(price & investment)
(price & investment)
question
The Exchange-Rate Effect
answer
-If P rises-->U.S. interest rates rise-->foreign investors desire more U.S. bonds-->higher demand for $ in foreign exchange market-->U.S. exchange rate appreciates-->U.S. exports are more expensive to people abroad, imports are cheaper to U.S. residents-->NX falls
question
What variables are apart of the Exchange-Rate Effect?
answer
P & NX
(price & net exports)
(price & net exports)
question
In America, do we want a strong or weak dollar?
answer
Weak dollar
question
In Europe, do Americans want a strong or weak dollar?
answer
Strong Dollar
question
Why does an increase in P reduce the quantity of g&s demanded?
answer
-the wealth effect (c falls)
-the interest-rate effect (I falls)
-the exchange-rate effect (NX falls)
-the interest-rate effect (I falls)
-the exchange-rate effect (NX falls)
question
What shifts a AD curve?
answer
Changes in C, I, G, & NX
question
Changes in C (regarding shifting AD curve)
answer
-stock market boom/crash
-tastes and preferences
-tax hikes/cuts
-tastes and preferences
-tax hikes/cuts
question
Changes in I (regarding shifting AD curve)
answer
-firms buy new computers, equipment, factories
-expectations, optimism/pessimism
-interest rates, monetary policy
-investment tax credits or other tax incentives
-expectations, optimism/pessimism
-interest rates, monetary policy
-investment tax credits or other tax incentives
question
Changes in G (regarding shifting AD curve)
answer
-federal spending
-state and local spending
-state and local spending
question
Changes in NX (regarding shifting AD curve)
answer
-booms/recessions in countries that buy our exports
-appreciation/depreciation resulting from international speculation in foreign exchange market
-appreciation/depreciation resulting from international speculation in foreign exchange market
question
What happens to the AD curve when a 10yo investment tax credit expires?
answer
AD curve shifts left-->I falls
question
What happens to the AD curve when the U.S. exchange rate falls?
answer
AD curve shifts right-->NX rises
question
What happens to the AD curve when a fall in prices increase the real value of consumers' wealth?
answer
Move down along AD curve (Wealth Effect)
question
What happens to the AD curve when state governments replace their sales taxes with new taxes on interest, dividends, and capital gains?
answer
AD curve shifts right-->C rises
question
What does the AS curve show?
answer
The total quantity of goods and services firms produce and sell at any given price level
question
Is the AS curve upward or downward sloping?
answer
Upward sloping in short run; VERTICAL in long run
question
Natural Rate of Output (Potential Output/Full-Employment Output)
answer
the amount of output the economy produces when unemployment is at its natural rate
question
What is the position of the AS curve in the Natural Rate of Output?
answer
Vertical
question
What is the Natural Rate of Output determined by?
answer
the economy's stock of labor, capital, natural resources, and the level of technology
question
Does an increase in P affect the Natural Rate of Output?
answer
No
question
What variables shift the AS curve?
answer
changes in stock of labor, capital, natural resources, and the level of technology
question
Changes in L or Natural Rate of Unemployment (regarding AS curve)
answer
-immigration
-baby-boomers retire
-govt policies reduce natural Unemployment Rate
-baby-boomers retire
-govt policies reduce natural Unemployment Rate
question
Changes in K or H (regarding AS curve)
answer
-investment in factories and equipment
-more people get college degrees
-factories destroyed by a hurricane
-more people get college degrees
-factories destroyed by a hurricane
question
Changes in Natural Resources (regarding AS curve)
answer
-discovery of new mineral deposits
-reduction in supply of imported oil
-changing weather patterns that affect agricultural production
-reduction in supply of imported oil
-changing weather patterns that affect agricultural production
question
Changes in Technology (regarding AS curve)
answer
-productivity improvements from technological progress
question
Over the long run, which way does technological progress shift the LRAS curve?
answer
Right
question
Over the long run, which way does the growth in the money supply shift the AD curve?
answer
Right
question
In the long run, is there ongoing inflation, stagnation, or deflation?
answer
Inflation
question
Is the SRAS curve upward or downward sloping?
answer
Upward
question
In the SRAS, an increase in P causes an increase or decrease in quantity supplied?
answer
Increase in quantity supplied
question
Do shifts in AD affect output and unemployment if AS is vertical?
answer
No
question
Do shifts in AD affect output and unemployment if AS slopes up?
answer
Yes
question
What are the 3 Theories of SRAS
answer
1. The Sticky-Wage Theory
2. The Sticky-Price Theory
3. The Misperceptions Theory
2. The Sticky-Price Theory
3. The Misperceptions Theory
question
What does output deviate from?
answer
It's natural rate
question
What does the actual price level deviate from?
answer
The price level people expect
question
Are nominal wages sticky in the short run or long run?
answer
Short run
question
Do nominal wages in the short run adjust quickly or slowly?
answer
Quickly
question
What are nominal wages set in advance based on?
answer
The prive level they expect to prevail
question
If price is larger than the price expected, is revenue higher or lower?
answer
Higher
question
If price is larger than the price expected, is labor cost higher or lower?
answer
Lower
question
If price is larger than the price expected, is production more or less profitable?
answer
More profitable
question
If price is larger than the price expected, do firms increase or decrease output and employment?
answer
Increase
question
Why are many prices sticky in the short run?
answer
Due to menu cost
question
Menu Cost
answer
The cost of adjusting prices
question
What are the sticky prices that firms set in advanced based on?
answer
Expected price
question
If the Fed increases the money supply unexpectedly, in the long run will P rise or fall?
answer
P will rise
question
Can firms without menu cost raise their prices immediately in the short run?
answer
Yes
question
Do firms with menu cost wait or immediately change their prices?
answer
Wait to change their prices
question
If prices are relatively low which increases demand for their products, does output and employment increase or decrease?
answer
Increase
question
What may firms confuse changes in P with?
answer
Changes in the relative price of the products they sell
question
If P is greater than expected price, do the prices rise or fall?
answer
Prices rise
question
What do all 3 theories of SRAS have in common?
answer
Output (Y) deviates from natural output (Yn) when price (P) deviates from expected price (Pe)
question
Formula for SRAS
answer
Y = Yn + a (P-Pe)
question
In the SR, if price is higher than expected, is output greater or smaller than natural output?
answer
Greater
question
In the SR, if price is lower than expected, is output greater or smaller than natural output?
answer
Smaller
question
Do sticky wages and prices become flexible or inflexible over time?
answer
Become flexible
question
Are misperceptions corrected over time?
answer
Yes
question
Does expected price equal the current price in the long run?
answer
Yes
question
Does natural output equal current output in the long run?
answer
Yes
question
What shifts SRAS curve?
answer
Changes in...
-consumption
-investment
-government spending
-net exports
-expected price
-consumption
-investment
-government spending
-net exports
-expected price
question
If price expected rises, do workers and firms set higher or lower wages?
answer
Higher wages
question
What are economic fluctuations caused by?
answer
Caused by events that shift the AD and or AS curves
question
4 Steps to Analyzing Economic Fluctuations
answer
1. Determine whether the event shifts AD or AS
2. Determine whether curve shifts left or right
3. Use AD-AS diagram to see how the shift changes Y and P in the short run
4. Use AD-AS diagram to see how economy moves from new SR eq'm to new LR eq'm
2. Determine whether curve shifts left or right
3. Use AD-AS diagram to see how the shift changes Y and P in the short run
4. Use AD-AS diagram to see how economy moves from new SR eq'm to new LR eq'm
question
"Underwater"
answer
homeowners owed more money than the house was worth
question
Stagflation
answer
a period of falling output and rising prices
-increase in P with decrease in Y
-increase in P with decrease in Y
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