chap 14

Question 1

recession

Answer 1

period of falling incomes and rising unemployment

Question 2

depression

Answer 2

a severe recession

Question 3

model of aggregate demand and supply

Answer 3

explains short-term fluctuations in economic activity around its long run trend

Question 4

aggregate demand

Answer 4

shows relationship b/w aggregate (overall) price lvl and total quantity of aggregate output demanded by houses, business, and govs

basically quantity g/s demanded at each price lvl

Question 5

interest rate effect

Answer 5

when price lvl dec, demand for money dec…..demand curve shifts left

dec IR for money supply, inc investment expenditures
- since investment is in aggregate demand, inc g/s is demanded

Question 6

real exchange rate effect

Answer 6

when canadian price lvls dec, canadian goods are cheaper than foreign goods
(bcs foreign exchange rate is constant)

inc CAD exports, dec imports of foreign g/s
- NX inc

greater amount CAD g/s demanded at lower CAD price lvls

Question 7

factors that cause the aggregate demand curve to shift left

Answer 7

1. changes in consumption and investment
   - if consumers pessimistic abt economic future, purchase fewer capital goods
2. changes in gov purchases
   - if G dec, aggregate d curve shifts left
3. changes in net exports (if dec, curve shifts left)
   - exports dec if US/world business cycle downturns of value of CAD dec
   - imports inc if value of CAD inc compared to world

Question 8

aggregate supply curve

Answer 8

says quantity of g/s that firms produce and sell at price lvls

vertical line bcs price lvl doesn’t impact real GDP

curve is at natural rate of output

Question 9

natural rate of output

Answer 9

production of g/s in long run when unemployment is at natural rate

supply curve is vertical bcs it depends on SUPPLIES OF LABOUR and FOP (not impacted by changing prices)

Question 10

long-term AS curve

Answer 10

curve may shift from changes in labour, capital, and natural resources

Question 11

short-term AS curve (SRAS)

Answer 11

price lvl raises quantity of g/s supplied (curve up)

curve up only occurs in short turn, bcs corrections are made to adjust to prices over time

Question 12

sticky wage theory

Answer 12

says output deviates from natural rate when price lvl deviates what’s expected

quantity of output supplied = natural rate of output + a (actual price lvl - expected price lvl)

a - # that determines how much output responds to changes in price lvl

Question 13

why SRAS might shift

Answer 13

1. changes in labour
   - dec labour causes shift left
2. changes in capital
3. changes in tech
4. changes in natural resources
5. changes in expected price lvl
   - inc in expected future price lvls causes higher fixed nominal wage
   - causes SRAS shift left

Question 14

long-run equilibrium`

Answer 14

point of SRAS equilibrium on LRAS curve

Question 15

2 causes of economic fluctations

Answer 15

dec in:
- aggregate demand
- aggregate supply

Question 16

concs abt shifts in AD

Answer 16

short run:
- real variables are affected, Y and employment
- fluctuations in economy’s output of g/s

long-run:
- nominal variables and wages affected
- real variables not affected
- affects overall price lvl but not output

Question 17

concs about shifts in AS

Answer 17

stagflation: a period of falling output and rising prices

shifts in aggregate supply can cause stagflation

policymakers can dec impact on output via aggregate demand, but inc stagflagtion

Question 18

wage-price spiral

Answer 18

phenomenon of higher prices leading to higher prices, causing to cont

eventually spiral slows, causing low output and unemployment
- dec wages bcs less bargaining power