Chapter 10 Flashcards
(33 cards)
What is aggregate supply?
The total of all planned production for the economy.
Describe the long-run aggregate supply curve.
The real GDP of the economy under conditions of full employment.
Define endowments with respect to an economy.
The various resources in an economy, including both physical resources, and human resources (ingenuity and management skills).
True or False
LRAS is the full information and full adjusted level of real output of goods and services. It is the level of real GDP that will continue being produced year after year, forever, if nothing changes.
True
True or False
Another way of viewing LRAS is to think of it as the full employment level of real GDP.
True
The natural unemployment rate consists of what two factors?
- Frictional Unemployment
2. Structural Unemployment
What are the determinants of growth in per capita real GDP?
The annual (per capita) rate of growth of:
- Labor
- Capitol
- Productivity of labor and capital
As the production possibilities curve shifts outward, what happens to the LRAS curve?
It shifts to the right.
True or False
LRAS tells us only about the economy’s long-run real GDP.
True
What is aggregate demand?
The total of all planned expenditures in the entire economy.
What is the aggregate demand curve?
A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.
What are the components of GDP?
Consumption, spending, investment expenditures, government purchases, and net foreign demand for domestic production.
GDP = C + I + S + G + X
True or False
The components of GDP have nothing to do with the components of aggregate demand.
False. All of the components of GDP correspond to aggregate demand determinants.
True or False
The aggregate demand curve gives the total amount, measured in the current years’ dollars of real domestic final goods and services that will be purchased at each price level.
False. The aggregate demand curve gives the total amount measured in a base year’s dollars, not the current year’s dollars, of real domestic final goods and services.
The higher the price level, the ___ the total real amount of final goods and services demanded in the economy.
Lower
With respect to the aggregate demand curve, the lower the price level, the _______ the total real GDP demanded by the economy, everything else remaining constant.
higher
What are the main three reasons that the aggregate demand supply curve slopes downward?
- The real balance effect
- The interest rate effect
- The open economy effect.
What is the real balance effect?
The change in expenditures resulting from a change in the real value of money balances when the price level changes.
What is another name for the real balance effect?
The wealth effect.
Explain why the real balance effect is coupled to purchasing power.
When the intrinsic value of your money drops, your purchasing power drops as well. This means that you will have to reduce your expenditures on goods and services.
Describe the interest-rate effect.
Higher price levels increase interest rates, which in turn cause businesses and consumers to reduce desired spending due to the higher costs associated with borrowing.
With respect to imports and exports, when domestic price levels rise, the result is a fall in _____ and a rise in ______.
Exports
Imports
Briefly describe the open economy effect.
A higher price level induces foreign residents to buy fewer US-made goods and US residents to buy more foreign-made goods, thereby reducing net exports and decreasing the amount of real goods and services produced within the United States.
What is the difference between a normal demand curve and the aggregate demand curve?
The aggregate demand curve looks at the entire economy as a whole, while a normal demand curve looks at an individual product or service.
