CH.8 Flashcards
(6 cards)
The shape of the AS curve is important for determining how the effects of an aggregate demand shock are divided between changes in __________ and changes in __________.
a) real GDP; wealth
b) investment; the price level
c) real GDP; the price level
d) investment; wealth
c) real GDP; the price level
- The AS curve has three distinct ranges:
- Over the flat range (also called the Keynesian range) of the AS curve, any aggregate demand shock leads to a change in equilibrium GDP but no change in the price level. The price level does not change because firms with excess capacity can adjust their output without generating any change in their unit costs. The change in output in this case is determined by the size of the simple multiplier.
- Over the intermediate range, along which the AS curve is positively sloped, a shift in the AD curve gives rise to appreciable changes in both real GDP and the price level. Due to the increase in the price level, the multiplier in this case is positive but smaller than the simple multiplier.
- Over the steep range, very little more can be produced, no matter how large the increase in demand. This range deals with an economy near its physical capacity constraints. Any change in aggregate demand leads to a sharp change in the price level and to little or no change in real GDP. The multiplier in this case is nearly zero.
aggregate demand shock
- Aggregate Demand Shock refers to a sudden and unexpected change in the level of aggregate demand in an economy. This can be either a positive or negative shock, depending on the direction of the change.
- A shift in the Aggregate Demand (AD) curve is termed an aggregate demand shock.
Positive Shock: A rightward shift in the AD curve, indicating an increase in desired aggregate spending at any given price level.
Negative Shock: A leftward shift in the AD curve, indicating a decrease in desired aggregate spending at any given price level.
In the Keynesian range of SRAS, if AD shifts to the left, then:
a) the real GDP falls
b) the price level rises
c) the price level falls
d) real GDP rises
a) real GDP falls
- The Keynesian range is the horizontal range of the SRAS where Keynes advocated government intervention to shift AD back to the right. Over this range of output the price level remains constant so government intervention will not lead to higher prices.
A fall in the domestic price level leads to a __________ in wealth and desired consumption and a(n) __________ shift in the AE curve.
a) fall; downward
b) rise; upward
c) fall; upward
d) rise; downward
b) rise; upward
- A fall in the price level leads to an increase in the real value of the private sector’s wealth, because much of the private sector’s total wealth is held in the form of assets with a fixed nominal value (such as money). What money can buy—its real value—depends on the price level. The lower the price level, the more goods and services a given amount of money can purchase. Hence, a reduction in the price level raises the real value of money holdings and shifts the AE curve upward.
Next
Which of these factors will cause the aggregate demand curve to shift?
a) a change in price level
b) a change in costs of production
c) a change in productivity
d) a change in the expectations of households and firms
d) a change in the expectations of households and firms
- A change in the expectations of households and firms will cause the aggregate demand curve to shift. A household’s expectation of an increase or a decrease in income can change their consumption habits and shift aggregate demand. By the same token a business can increase or decrease investment in capital based on expectations about the future which will also cause a shift in aggregate demand.
A change in the price level is simply a movement along an existing aggregate demand curve. And an increase in productivity impacts aggregate supply.
Aggregate supply shocks cause:
a) the price level and real GDP to change in the same direction
b) the price level and real GDP to change in opposite directions
c) no change in the price level and real GDP to increase
d) no change in the price level and real GDP to decrease
b) the price level and real GDP to change in opposite directions
- A positive aggregate supply shock, shown by a downward (or rightward) shift in the AS curve, means that more real output will be supplied at any given price level. A negative aggregate supply shock, shown by an upward (or leftward) shift in the AS curve, means that less real output will be supplied at any given price level. With an increase in supply, the price level falls and GDP rises; with a decrease in supply, the price level rises and GDP falls.
