Aggregate Demand and Aggregate Supply

Question 1

Aggregate Demand

Answer 1

Aggregate price level (PL) is measured by either the GDP deflator or the CPI. Inverse relationship between PL and Quantity Demand of Real GDP

Question 2

Why is the aggregate demand curve downward sloping?

Answer 2

1. Wealth Effect 2. Interest Rate Effect 3. International Substitution Effect

Question 3

Wealth Effect

Answer 3

Price levels decrease –> purchasing power rises –> wealth rises –> consumers buy more goods –> Real GDP demand increases

Question 4

Interest Rate Effect

Answer 4

As Price Level drops –> purchasing power rises –> decreased demand for a fixed supply of money causes the price of money (interest rate) to fall –> as rates drop spending that is sensitive to rates increases –> Real GDP demand increases

Question 5

International Substitution Effect (net export effect)

Answer 5

as domestic prices rise –> foreign made goods become relatively cheaper –> demand for imports increases –> demand for US goods by foreigners decreases because they cost more –> exports decrease

Question 6

Agents (people who affect the curve)

Answer 6

1. Consumers 2. Firms > Capital 3. Government 4. Federal Reserves 5. Foreign Nations

Question 7

What shifts the Aggregate Demand Curve?

Answer 7

1. Consumer Spending 2. Changes in Investment Spending 3. Changes in Government Spending–changes in fiscal policy 4. Changes in Net Export Spending 5. Optimism

Question 8

Immediate Short Run Aggregate Supply Curve

Answer 8

Fixed Input and Output Prices. Aggregate Supply Curve is Horizontal

Question 9

Short Run Aggregate Supply Curve

Answer 9

Input prices are fixed or highly inflexible; output prices can vary. Aggregate Supply Curve is upward sloping

Question 10

Long Run Aggregate Supply Curve

Answer 10

Input and output prices can vary. Vertical supply curve at full employment

Question 11

Shifters for Aggregate Supply Curve

Answer 11

1. Change in input prices 2. Change in productivity 3. Change in legal institutional environment