question
what is the aggregate demand curve?
answer
price level of all goods and services that everyone buys during a time period
question
which axis measures the average price of goods and services using the CPI?
answer
the vertical axis
question
which axis measures the value of final goods and services in base year dollars?
answer
the horizontal axis
question
why does the aggregate demand curve slope downward to the right?
answer
1. real balances effect
2. interest-rate effect
3. net exports effect
2. interest-rate effect
3. net exports effect
question
what is the real balances effect?
answer
consumers spend more on goods and services because lower prices make their dollars more valuable
question
what is the interest-rate effect?
answer
assuming a fixed money supply, an increase in the price level increases borrowing demand and in turn higher interest rates, which discourages consumer spending
question
what is the net exports effect?
answer
a higher domestic price level makes U.S. goods more expensive compared to foreign goods. As a result, exports decreases and imports increase, which decreases real GDP through the net exports component (X-M)
question
what can cause a shift in the aggregate demand curve?
answer
any of the components of GDP: C, I, G, (X-M)
question
what is the aggregate supply curve?
answer
the curve that shows the level of real GDP produced at different price levels during a time period. there are 2 opposing theories for the shape of the AS curve; keynesian and classical views
question
what is the keynesian view of the aggregate supply curve?
answer
a horizontal supply curve exists because product prices and wages are fixed
question
why did keynes assume fixed product prices and wages?
answer
during a deep recession, there are many idle resources in the economy
question
why do idle resources cause fixed prices?
answer
firms are willing to sell products because there are no shortages to put upward pressure on prices
question
why do idle resources result in fixed wages?
answer
1. unemployed workers willing to work for lower wages diminish the power of employed workers to increase their wages
2. union contracts prevent businesses from lowering wage rates
2. union contracts prevent businesses from lowering wage rates
question
according to keynes, government spending must be used for what?
answer
to increase aggregate demand and restore a depressed economy to full employment
question
what is the classical view of the aggregate supply curve?
answer
a vertical line at the full-employment real GDP
question
what 2 things describe classical economists?
answer
full-employment real GDP and flexible prices and wages
question
why is the aggregate supply curve upward-sloping in the intermediate range?
answer
1. obstacles to output flow
2. labor shortages
3. production costs rise
2. labor shortages
3. production costs rise
question
how is macro equilibrium determined?
answer
when the aggregate demand curve equals the aggregate supply curve
question
how do increases in the aggregate demand curve affect the price level and real GDP?
answer
1. Keynesian range- GDP increases- price level is constant
2. intermediate range- GDP increases- price level increases
3. classical range- GDP remains at the full-employment level-price level increases
2. intermediate range- GDP increases- price level increases
3. classical range- GDP remains at the full-employment level-price level increases
question
what are some examples of factors that would cause a rightward shift in the aggregate supply curve?
answer
1. lower labor costs
2. lower oil prices
3. lower taxes
4. reduced government regulations
2. lower oil prices
3. lower taxes
4. reduced government regulations
question
what are the 2 types of inflation?
answer
cost-push and demand-pull
question
what is cost-push inflation?
answer
a rise in the general price level resulting from an increase in the cost of production that causes the aggregate supply curve to shift left
question
what is stagflation?
answer
high unemployment and rapid inflation exist at the same time
question
what is demand-pull inflation?
answer
a rise in the general price level resulting from an excess of total spending caused by a rightward shift in the aggregate demand curve
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