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MacroEcon Ch 12, 13

Swalaheen Aggregate Expenditure/ Aggregate Supply and Demand

QuestionAnswer
Aggregate Expenditure Model Focuses on the short-run relationship between total spending and real GDP. *In any particualr year, the level of GDP is determined mainly by the level of aggregate expenditure.
4 components of aggregate expenditure that together equal GDP Consumption (C), Planned Investment (I), Government Purchases (G), Net Exports (NX)
Inventories Goods that have been produced but not yet sold. *Changes in inventories are included as part of investment spending.
Macroeconomic Equilibrium Occurs where total spending, or aggregate expenditure, equals total production, or GDP. Aggregate Expenditure = GDP
When, AE = GDP Inventories are unchanged, the economy is in macroeconomic equilibrium.
When, AE < GDP Inventories rise, GDP and employment decrease.
When, AE > GDP Inventories fall, GDP and employment increase.
5 important variables of Consumption. 1)Current disposable income, 2)household wealth, 3)expected future income, 4)the price level, and 5)the interest rate.
Current Disposable Income Most important Variable of Consumption. *We would expect consumption to increase when the current disposable income of households increase and to decrease when the current disposable income of households decrease.
Consumption Function The relationship between consumption spending and disposable income.
Autonomous Expenditure An expenditure that does not depend on the level of GDP. *Does not depend on level if GDP Ex)Planned Investment Spending, Government Spending, and Net Exports.
Multiplier The increase in equilibrium real GDP divided by the increase in autonomous expenditure.
Multiplier Effect The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.
Aggregate Demand Curve (AD) A curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect the aggregate expenditure.
Increases in the price level cause AE... To fall.
T/F: A rising price level decreases consumption by decreasing the real value of household wealth. TRUE
T/F: If the price level in the US rises relative to the price levels in other countries, US exports will become relatively less expensive and foreign imports will become relatively more expensive, causing net exports to rise. FALSE. The rise in US price levels causes US exports to become MORE expensive, and foreign imports will become relatively LESS expensive, causing net exports to FALL.
Aggregate Demand and Supply Model A model the explains short-run fluctuations in real GDP and the price level.
T/F: Fluctuations in real GDP and the price level are caused by shifts in the aggregate demand curve or in the aggregate supply curve. TRUE.
Aggregate Demand (AD) Curve A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
Short-Run Aggregate Supply (SRAS) Curve A curve that shows the relationship in the short-run between the price level and the quantity of real GDP by firms.
Why is the aggregate demand curve sloped downward? Because a fall in the rpice level increases the quantity of real GDP demanded.
The Wealth Effect As income rises, consumption will rise and as income falls, the consumption will fall. When price level rises, the real value of the household wealth declines, and so will consumption, thereby reducing the demand for goods and services.
The Interest Rate Effect Because a higher price level increases the interest rate and reduces interest spending, it also reduces the quantity of goods and services demanded. reverse effect for a lower price level.
The International Trade Effect A lower price level in the US relative to other countries causes net exports to rise, increasing the quantity of goods and services demanded. A higher price level has a reverse effect.
T/F: The aggregate demand curve tells us the relationship between the price level and the quantity of real GDP demanded, holding everything else CONSTANT. TRUE.
Variables that shift the aggregate demand curve. 1) Changes in government policies. 2) Changes in the expectations of households and firms. 3) Changes in foreign variables.
Monetary Policy Actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth. *Ensures the flow of funds from lenders to borrowers.
T/F: By lowering interest rates, the Fed can lower the cost to firms and households of borrowing. Lowering borrowing costs increases consumption and investment which shifts the AD curve to the LEFT. FALSE. The aggregate demand curve would shift right. *Higher interest rates shift the aggregate to the left.
Fiscal Policy Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
T/F: An increase in government purchases shifts the aggregate demand curve to the LEFT. FALSE. It shifts to the right. *A decrease in government purchases shifts the aggregate demand curve to the LEFT.
T/F: Higher personal income taxes REDUCE consumption spending and shift the aggregate demand curve to the LEFT. TRUE.
T/F: Increase in business taxes REDUCE the profitability of investment spending and shift the AD curve to the LEFT. TRUE.
T/F: If a firm or household is more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the LEFT. FALSE. It will shift to the right. *If a household or firm is more optimistic about the future incomes, they are likely to increase their current consumption.
T/F: If real GDP in the US INCREASES faster than real GDP in other countries, US imports will increase faster than US exports, and net exports will FALL. TRUE.
T/F: A change in net exports (NX) that results from a change in price level in the US will result in a right shift in the AD curve. FALSE. It will result in a MOVEMENT along the the aggregate demand curve, NOT a shift.
An Increase in interest rates will cause the aggregate demand curve to... Shift to the left. *Higher interest rates raise the cost to firms and households of borrowing, reducing consumption and investment spending.
An increase in government purchases causes the AD curve to... Shift to the right. *Government purchases are a component of the aggregate demand.
An increase in personal income taxes or business taxes causes the AD curve to... Shift to the left. *Consumption spending falls when personal taxes rise, and investment falls when business taxes rise.
An increase in households expectations of their future incomes causes the AD curve to... Shift to the right. *Consumption spending would increase.
An increase in a firms expectations of future profitability of investment spending causes the AD curve to... Shift to the right. *Investment spending would increase.
The growth rate of domestic GDP relative to the growth rate of foreign GDP cause the AD curve to... Shift to the left. *Imports will increase faster than exports, reducing net exports (NX).
An increase in the exchange rate (the value of the dollar) relative to foreign currencies will cause the AD curve to... Shift to the left. *Imports will rise and exports will fall, thereby reducing net exports (NX).
T/F: Changes in the price level do not affect the level of aggregate supply in the long run. TRUE.
Potential GDP or (Full-Employment GDP) Level of GDP in the long run.
In the long run, the level of GDP is determined by: The number of workers (Capital Stock) including; factories, office buildings, machinery and equipment, and available technology.
Long-Run Aggregate Supply (LRAS) Curve A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.
Why is the SRAS curve upward sloping? Because, over the short run, as the price level increases, the quantity of goods and services firms are will to supply will increase. Also, as the price level rises or falls, some firms are slow to adjust their prices.
What does it mean when prices or wages are said to be "Sticky"? Because they do not respond quickly to changes in demand or supply.
Menu Costs The costs to firms of changing prices.
There is a movement along the AS curve when... There is change in price level but other variables are unchanged. *If any variable other than the price level changes, the AS curve will shift.
Variables that shift the SRAS curve. 1) Increases in the labor force and in capital Stock. 2) Technological change. 3) Expected changes in future price level.
T/F: f the workers and firms across the economy are adjusting to the price level being HIGHER than expected, the SRAS curve will shift to the RIGHT. FALSE. It will shift to the LEFT. It will shift RIGHT when they are adjusting to a LOWER price level.
Supply Shock An unexpected event that causes the SRAS curve to shift. *Often caused by unexpected increases or decreases in the prices of important natural resources that can case firms' cost to be different from what they expected. ex) Oil Prices
T/F: Because of inflation workers and firms always expect next year's price level to be higher than this year's. TRUE. *Expectations of a higher price level will cause the SRAS curve to shift to the left.
An increase in the labor force or capital stock causes the SRAS curve to... Shift to the right. *More output can be produced at every price level.
An increase in productivity causes the SRAS curve to... Shift to the right. *Costs of producing output fall.
An increase in the expected future price level causes the SRAS curve to... Shift to the left. *Workers and firms increase wages and prices.
An increase in workers and firms adjusting to having previously underestimated the price level causes the SRAS curve to... Shift to the left. *Workers and firms increase wages and prices.
An increase in the expected price of an important natural resource causes the SRAS curve to... Shift to the left. *Costs of producing output rise.
T/F: In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. TRUE.
T/F: In the short run, a DECREASE in the AD causes a recession. In the long run, it causes only an INCREASE in the price level. FALSE. In the short run, a DECREASE in AD results in a recession, and causes only a DECREASE in price level in the long run.
T/F: Economists refer to the process of adjustment back to potential GDP as an AUTOMATIC MECHANISM because it occurs without any actions by the government. TRUE.
Stagflation A combination of inflation and recession, usually resulting from a supply shock.
What is the usual cause of inflation? If total spending in the economy grows faster than total production, prices rise.
Created by: KAzetapi
 

 



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