Chapter 11: Aggregate Supply & Demand Flashcards
(31 cards)
What are the major macroeconomic outcomes?
Output, jobs, prices, economic growth, and international balances.
What are the main macroeconomic determinants?
Internal market forces, external shocks, and policy levers.
What is the goal of the AD-AS model?
To explain how macro outcomes like output and prices are determined.
What did classical economists believe about the economy?
That it is inherently stable and self-adjusting.
Why did the Great Depression disprove classical theory?
Falling wages and prices didn’t restore full employment.
What was Keynes’ view of the macroeconomy?
That it is inherently unstable and requires government intervention.
What is aggregate demand?
The total quantity of output demanded at different price levels in a given time period.
What causes the AD curve to slope downward?
Real balances effect, foreign trade effect, and interest rate effect.
What is the real balances effect?
Lower prices increase the value of money, so people spend more.
What is the foreign trade effect?
Lower domestic prices lead to fewer imports and more exports.
What is the interest rate effect?
Lower prices reduce borrowing needs and interest rates, increasing spending.
What is aggregate supply?
The total quantity of output producers are willing to supply at different price levels.
Why is the AS curve upward sloping?
Rising prices increase profit margins and costs rise with output.
What causes shifts in the AS curve?
Changes in production costs, taxes, regulations, disasters, etc.
What is macro equilibrium?
The price-output point where AD equals AS.
What are the two problems with macro equilibrium?
Undesirability (e.g. high unemployment or inflation) and instability (e.g. shifts in AD/AS).
What is full employment GDP?
The output level when all available resources are used efficiently.
What causes undesirable outcomes?
When equilibrium output < full employment or price level > desired.
What causes instability?
Shifts in AD or AS due to demand shocks or supply shocks.
What causes a recession in terms of AS/AD?
Declines in AD and/or AS shift curves left, lowering output and employment.
What are the three policy tools to fix macro problems?
Shift AD, shift AS, or do nothing.
What is fiscal policy?
Government use of taxes and spending to affect macro outcomes.
What is monetary policy?
Control of money and credit to influence the economy.
What is supply-side policy?
Policies like tax cuts or deregulation to increase production.
