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Flashcards in Chapter 10 Deck (33)
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1
Q

What is aggregate supply?

A

The total of all planned production for the economy.

2
Q

Describe the long-run aggregate supply curve.

A

The real GDP of the economy under conditions of full employment.

3
Q

Define endowments with respect to an economy.

A

The various resources in an economy, including both physical resources, and human resources (ingenuity and management skills).

4
Q

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.

A

True

5
Q

True or False

Another way of viewing LRAS is to think of it as the full employment level of real GDP.

A

True

6
Q

The natural unemployment rate consists of what two factors?

A
  1. Frictional Unemployment

2. Structural Unemployment

7
Q

What are the determinants of growth in per capita real GDP?

A

The annual (per capita) rate of growth of:

  1. Labor
  2. Capitol
  3. Productivity of labor and capital
8
Q

As the production possibilities curve shifts outward, what happens to the LRAS curve?

A

It shifts to the right.

9
Q

True or False

LRAS tells us only about the economy’s long-run real GDP.

A

True

10
Q

What is aggregate demand?

A

The total of all planned expenditures in the entire economy.

11
Q

What is the aggregate demand curve?

A

A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.

12
Q

What are the components of GDP?

A

Consumption, spending, investment expenditures, government purchases, and net foreign demand for domestic production.

GDP = C + I + S + G + X

13
Q

True or False

The components of GDP have nothing to do with the components of aggregate demand.

A

False. All of the components of GDP correspond to aggregate demand determinants.

14
Q

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.

A

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.

15
Q

The higher the price level, the ___ the total real amount of final goods and services demanded in the economy.

A

Lower

16
Q

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.

A

higher

17
Q

What are the main three reasons that the aggregate demand supply curve slopes downward?

A
  1. The real balance effect
  2. The interest rate effect
  3. The open economy effect.
18
Q

What is the real balance effect?

A

The change in expenditures resulting from a change in the real value of money balances when the price level changes.

19
Q

What is another name for the real balance effect?

A

The wealth effect.

20
Q

Explain why the real balance effect is coupled to purchasing power.

A

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.

21
Q

Describe the interest-rate effect.

A

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.

22
Q

With respect to imports and exports, when domestic price levels rise, the result is a fall in _____ and a rise in ______.

A

Exports

Imports

23
Q

Briefly describe the open economy effect.

A

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.

24
Q

What is the difference between a normal demand curve and the aggregate demand curve?

A

The aggregate demand curve looks at the entire economy as a whole, while a normal demand curve looks at an individual product or service.

25
Q

State the fundamental proposition of the aggregate demand curve.

A

Any non-price level change that increases aggregate spending on domestic goods shifts the aggregate demand curve to the right.

Any non-price level change that decreases aggregate spending on domestic goods shifts the aggregate demand curve to the left.

26
Q

List some of the determinants of aggregate demand.

A
  1. Increase/decrease in the amount of money in circulation.
  2. Increased/decreased security about future jobs or income.
  3. Improvement/Declines in the economies of other countries.
  4. A rise/reduction in real interest rates.
  5. Tax Increases/decreases
  6. Changes in foreign currency exchange rates.
27
Q

If all of the factors that affect total planned real expenditures are unchanged over any given period of time, what will happen to the aggregate demand curve?

A

Nothing, the curve will stay completely fixed.

28
Q

In a case where the aggregate demand curve does not change over a period of time, but in which the long-run aggregate supply curve shifts to the right, what will this cause with respect to inflation?

A

The economy as a whole would experience secular deflation.

29
Q

Define secular deflation.

A

A persistent decline in prices resulting from economic growth and the presence of stable aggregate demand.

30
Q

If the LRAS shifts to the left what will happen to the price level?

A

The price level will rise.

31
Q

If the long-run aggregate supply curve remains constant while the aggregate demand curve shifts to the right, what will happen to the price level?

A

The price level will increase.

32
Q

What could cause a leftward shift in the aggregate supply schedule?

A
  1. Reductions in labor force participation.
  2. Higher marginal taxes on wages.
  3. Provision of government benefits that give households incentives not to supply labor services to firms.
33
Q

If an economy is growing under what circumstances will there be persistent inflation?

A

Aggregate demand outruns LRAS.

Explanation: Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve.