Aggregrate Supply/Demand

Question 1

What is Aggregate Demand?

Answer 1

total spending on all goods and services at a period of time at a given price level

Question 2

What are the determinints of AD?

Answer 2

C + I + G + (X-M)

Question 3

What does AD show?

Answer 3

relationship between GDP level (output demanded) and economy’s price level

Question 4

What are causes of changes in consumption spending

Answer 4

• changes in consumer confidence
• changes in interest rates
• changes in wealth
• changes in income taxes (tax more, disposable income decrease, spending decrease)
• change in household indebtness (more debt, less spending) - expectations of future price level

Question 5

What are examples of Consumption (C)?

Answer 5

spending on (non) durable goods/services

Question 6

What are examples of Investment (I)?

Answer 6

additional capital stocks to the economy, increasing output due to increase in demand

Question 7

What are examples of Government spending (G)?

Answer 7

healthcare, transfortation, education, housing….

Question 8

What are Exports (X)?

Answer 8

domestic goods/services bought by foreigners

Question 9

What are Imports (M)?

Answer 9

foreign goods/services bought domestically

Question 10

Why AD curve downward sloping?

Answer 10

• Real Wealth Effect (price level ↑, wealth/excess money ↓
• Interest Rate Effect (interest rate ↑ by more demand of money, borrowing ↓)
• Exchange Rate Effect (domestic price↑ domestic good more expensive, less net export)

Question 11

Can national income cause AD shifts?

Answer 11

No

Question 12

What is short run?

Answer 12

when price level changes but price of FOP’s (resources) DON’T

Question 13

What is long run?

Answer 13

when price of FOP’s (resources) CHANGE WITH price level

Question 14

Why don’t wages (price of labor) change with price level in short periods of time? (sticky wages)

Answer 14

• labor contracts have fix wage rates (2 yr contract at 5/hr) - minimum wage legislation fix to LOWEST LEGALLY possible wage - labor unions/workers REFUSE WAGE CUTS - wage cuts negative effect motivation so firms avoid them

Question 15

What does short/long run affect?

Answer 15

AGGREGATE SUPPLY! not AD

Question 16

What is Aggregate Supply (AS)?

Answer 16

totaly QUANTITY of goods/services produced (real GDP) over time period at diff price levels (price level vs real GDP)

Question 17

What does SRAS show?

Answer 17

the relationship between price levels and quantity of real output (real GDP) when FOP prices DON’T CHANGE

Question 18

What causes shifts in the SRAS curve? shift where?

Answer 18

shift in SUPPLY SHOCKS (shift left), SUBSIDIES (shift right)

Question 19

Why is SRAS curve upward sloping?

Answer 19

*positive relationship between price level & real GDP*

• price level↑, output price↑, in short run so FOP price same so price level change profit ↑. more profitable so product more (higher GDP)
• price level ↓, output price ↓, FOP price same cause short run so profit ↓. less profitable so product less (lower GDP)

Question 20

What causes SRAS curve to shift?

Answer 20

• changes in wages (if wage ↑ with non-changing price level, then costs of production ↑, SRAS shift left) vise versa
• changes in indirect taxes (↓ indirect tax ↓ production costs so can produce more, SRAS shift right) vise versa
• supply shocks (SUDDEN EVENTS that effect SRAS) (if suddenly war, economy disrupted, ↓ outputs produced and ↓ spending, SRAS shift left) vise versa
• changes in subsidies offered to businesses (subsidies ↑ production costs↓ so can produce more, SRAS shift right) vise versa

Question 21

How to shift AD curve in SR?

Answer 21

↑ AD (↑investment, spending etc) , AD shift right, price and GDP ↑. less unemployment cause firms need to hire more labor to fulfill the ↑ demand

vise versa

Question 23

make from 9.3