Chapter 11 - Aggregate Supply And Demand

Question 1

What are the 3 determinants of the Macro Economy

Answer 1

-Internal market forces
-External shocks
-Policy levers

Question 2

Describe “internal market forces”

Answer 2

Population growth, spending behavior, invention and innovation

Question 3

Describe “external shocks”

Answer 3

Wars, natural disasters, terrorist attacks, trade disruptions

Question 4

Describe “policy levers”

Answer 4

Tax policy, gov spending, changes in interest rates, credit availability, money, trade policy immigration policy, and regulation

Question 5

What are the 3 outcomes of the macro economy

Answer 5

Output (GDP)
Jobs (unemployment rate)
Prices (inflation)

Question 6

Describe “output”

Answer 6

The total volume of goods and services produced (real GDP)

Question 7

Describe “jobs”

Answer 7

The levels of employment and unemployment

Question 8

Describe “prices”

Answer 8

The average prices of goods or services

Question 9

What is aggregate demand?

Answer 9

The TOTAL QUANTITY of output demanded at alternative price levels at a given time period

Question 10

Describe the aggregate demand curve

Answer 10

Downwards sloping. Real output (quantity/year)on x axis and price level (average price) on y axis

Question 11

The aggregate demand curve shows that lower prices encourage….

Answer 11

MORE SPENDING

Question 12

When looking at the aggregate demand curve, when average price decreases, real output ____. What does this say about the demand for output?

Answer 12

Real output increases. Therefore, more output is demanded

Question 13

What are the 3 reasons for the AD curve being downwards sloping?

Answer 13

1. Real balances effect
2. Foreign trade effect
3. Interest-rate effect

Question 14

Describe the real balances effect

Answer 14

As prices fall, money can purchases MORE goods and services (purchasing power increases as prices decrease). Value of money is measured by how much goods and services 1$ can buy

Question 15

Describe the foreign trade effect

Answer 15

If domestic prices decline, consumers demand more domestic output (and fewer imports)
Also, other countries are more likely to want to buy our products

Question 16

Net export =

Answer 16

Exports - imports

Question 17

AD=

Answer 17

C+I+G+NE

C=consumption
I=Investment
G=Government
NE=Net Exports

Question 18

As price decreases, what happens to AD? Why?

Answer 18

AD increases because consumption (C) increases

Question 19

When consumers’ real income increases as a result of a decline in price, what happens to their spending habits?

Answer 19

Consumers will buy MORE goods and services C increases

Question 20

Describe the interest rate effect

Answer 20

At lower price levels, interest rate falls as consumers borrow less

Question 21

Lower interest rates stimulate ____ borrowing and loan-financed purchases

Answer 21

MORE

Question 22

Under the interest rate effect, what 2 things in the AD equation increase?

Answer 22

Consumption and investment (consumers AND businesses borrow and finance)

Question 23

What is aggregate supply?

Answer 23

The TOTAL QUANTITY of output producers are willing and able to supply at alternative price levels in a given time period

Question 24

Describe the aggregate supply (AS) curve

Answer 24

Upwards sloping. Price level (AVERAGE PRICE) on Y axis and REAL OUTPUT (quantity/year) on X axis

Question 25

Higher prices encourage _____ production

Answer 25

More

Question 26

Give 2 reasons for the AS curve being upwards sloping

Answer 26

1. Profit margins 2. Costs

Question 27

Explain why “Profit Margins” is considered a reason for the AS curve being upwards sloping

Answer 27

Higher product prices tend to widen producers’ profit margins so they will want to produce more and sell more goods

Question 28

Explain why “Costs” is considered a reason for the AS curve being upwards sloping

Answer 28

Production costs tend to increase as producers try to produce more. Therefore, they must use existing equipment more extensively which causes them to get worn out. They need to replace the machine which causes them to spend lot of $ and thus price to consumer increases

Question 29

_______ exists where PE=QE

Answer 29

Macro equilibrium

Question 30

At QE, desired spending =…

Answer 30

Production

Question 31

What are 2 potential problems with macro equilibrium?

Answer 31

1. Undesirability 2. Instability

Question 32

Describe the macro equilibrium problem of undesirability

Answer 32

The price-output relationship at equilibrium may not satisfy our macroeconomic goals

Question 33

In order to go closer to full employment (Qf), ____ has to go down which is undesirable

Answer 33

Price

Question 34

What are the 3 undesirable outcomes?

Answer 34

-full-employment GDP -Unemployment -Inflation

Question 35

Describe the potential problem of instability

Answer 35

Even if the designated macro equilibrium is optimal, it may be displaced by macro disturbances

Question 36

Describe how macro disturbances can affect macro equilibrium

Answer 36

When aggregate demand shifts left, lower price levels and lower level of output result When aggregate supply shifts left, higher price levels and less output

Question 37

Apply a real life example to a leftward shift of the AS curve

Answer 37

Higher gas prices raise the cost of producing (airline, travel, deliveries, etc) Thus, producers will be producing less at the same price/even higher price

Question 38

Apply a real life example to a leftward shift of the AD curve

Answer 38

If someone makes the same amount of money from 2020-2021 but their tax percent increases by 10%, they will have less after tax income in their pocket and won’t spend as much

Question 39

Describe what happens to the AD equation when the AD curve shifts to the left

Answer 39

C goes down, causing AD to go down

Question 40

What is individual demand?

Answer 40

Ability and willingness to buy a good or service by an individual

Question 41

What is market demand?

Answer 41

Total quantity demanded by all consumers for a SPECIFIC GOOD

Question 42

What is aggregate demand?

Answer 42

The total quantity of output demanded for ALL GOODS AND SERVICES in a given economy