CH 7

Question 1

Potential Output

Answer 1

Level of output an economy can achieve when labor is employed at normal level

Question 2

Aggregate Demand

Answer 2

Relationship between total quantity of goods/services demanded from all 4 sources of demand and the price level, all other determinate of spending unchanged.

Question 3

4 sources of Aggregate Demand

Answer 3

1. Consumption
2. Personal Investments
3. Government Purchases
4. Net Exports

Question 4

Aggregate Demand Curve

Answer 4

Graphical representation of aggregate demand

Question 5

Why does Aggregate demand slope downward

Answer 5

1. Wealth effect
2. Interest rate effect
3. International trade effect

Question 6

Wealth Effect

Answer 6

Change in prices level to affect real wealth and thus alter consumption. Price level goes down which increases real wealth and consumers buy more goods.

value-liability= wealth

Question 7

Interest Rate Effect

Answer 7

Change in price level to affect interest rate, thus to affect quantity of investment demanded

Lower interest rate=greater investment

Question 8

International Trade Effect

Answer 8

Change in price level to affect net exports.

price level drop leads to lower exports

Question 9

Changes in Aggregate Demand (shift) determinates

Answer 9

1. Consumption (consumer confidence)
2. Investment (increase/decrease inventories based on consumer confidence)
3. Government Purchases (stimulus packages)
4. Net Exports (exchange rate)
   Weaker $ is better, shifts demand curve out

Question 10

LRAS

Answer 10

1. Long run aggregate supply
2. Potential RGDP
3. Production possibilities frontier

Vertical: independent of price level
Sits at full employment