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macroeconomics > chapter 14 > Flashcards

chapter 14 Flashcards

1
Q

what is aggregate demand curve?

A

shows the quantity of all goods and services that households, firms and governments want at a given price level

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2
Q

what is the aggregate supply curve?

A

shows the quantity of all goods and services that firms chose to produce and sell

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3
Q

what way is the aggregate demand curve sloping?

A

it is downward sloping

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4
Q

why is the aggregate demand curve downward sloping?

A

due to the key factors in the demand curve

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5
Q

what are the 4 key factors of the aggregate demand curve?

A

consumption
investment
government spending
net exports

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6
Q

what are the 3 effects why the demand curve is downward sloping?

A

the wealth effect
the interest rate effect
the exchange rate effect

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7
Q

why does the wealth effect cause the demand curve to slope downward?

A

price levels drops when consumers are wealthier, causing aggregate demand to increase

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8
Q

what are the 2 things the wealth effect impacts?

A

price levels and consumption

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9
Q

why does the interest rate effect cause the demand curve to slope downward?

A

price levels drops when less liquidity is demanded, causing interest rates to drop making loans cheaper for investment

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10
Q

what are the 2 things the interest rate effect impacts?

A

price levels and interest rates

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11
Q

why does the exchange rate effect cause the demand curve to slope downwards?

A

price levels drop causing domestic exports to be more attractive and imports become more expensive

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12
Q

what are the 2 things that the exchange rate effect impacts?

A

price levels and exchange rate

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13
Q

what kind of relationship is between price levels and aggregate demand?

A

negative

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14
Q

what are the 4 factors that might shift the aggregate demand curve?

A

change in consumption
change in investment
change In government spending
change in net exports

Y=C+I+G+NX

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15
Q

why is the aggregate supply curve vertical in the long run?

A

in the long run an economies production of goods and service depends on its factors of production and technology, prices do no affect these determinants on real GDP

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16
Q

what does the long run production of goods and services of an economy depend on?

A

the factors of production not the prices

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17
Q

what might shift the long run aggregate supply curve?

A

the natural rate of output

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18
Q

what is the natural rate of output?

A

the production of goods and services an economy achieves in the long run when unemployment is at a natural rate

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19
Q

what is another term for the natural rate of output?

A

potential output

20
Q

what are the 4 factors that can change the natural rate of output?

A

change of labour
change of capital
change of natural resources
change of technological knowledge

21
Q

how will technological shock impact the aggregate supply and demand?

A

it will cause the long run aggregate supply curve to shift to the right or increase (increasing production)

22
Q

what will the increase of aggregate supply from the technological shock cause the BOC to do?

A

the bank of Canada will increase the money supply

23
Q

how will the increased money supply from the bank of Canada impact the aggregate supply and demand market (interest rates, investment, aggregate demand)?

A

it will cause intrest rates to go down
investment to go up
aggregate demand to go up (shift curve up to the right)

24
Q

how will the shift of aggregate supply to the right impact prices?

A

it will causes prices to go up (inflation)

25
Q

why will the bank of canada increase the money supply if the long run aggregate supply curve increases?

A

they will increase the money supply so the aggregate demand matches the supply

26
Q

what are the 2 main reasons the aggregate supply curve is downward sloping in the short run?

A

the sticky wage theory
sticky price theory

27
Q

what do the 2 main theories of why the short run supply curve is downward sloping explain?

A

that price levels influence the output in the short run, which reflects specific market imperfections that result in the supply curves to be different in the long run and the short run

28
Q

what is the sticky wage theory?

A

the theory that nominal wages are based on expected prices and do not reflect the prices levels in the economy

29
Q

what is an example of the sticky wage theory?

A

contracts are signed periodically and incorporate expected inflation to reflect desired wage growth

30
Q

what is the sticky price theory?

A

prices are slow to adjust in response to changing economic conditions due to the cost of making the adjustments

31
Q

what is an example of the sticky price theory?

A

when prices go up, restaurants will only change their prices on their menus if the prices increase a lot because it is expensive to make and print updated menus

32
Q

how do the sticky wage theory and the sticky price theory relate to the aggregate supply and demand market?

A

wages and price are flexible in the long run and are sticky in the short run

33
Q

what are the 4 things that might cause a shift in the long run aggregate supply curve?

A

change in labour
change in capital
change in natural resources
change in technology

34
Q

what might cause a shift in the short term aggregate supply curve?

A

change in prices

35
Q

how will expected price increases in the future impact consumption, demand and supply?

A

demand and consumption will decrease and so will supply decrease

36
Q

how will a wave of pessimism of in the economy, how will that impact the supply and demand?

A

people will save more today (consuming less) less aggregate demand

output and price will decrease from expected low prices (consuming more) increase in aggregate supply

37
Q

what causes a change in short term aggregate supply?

A

a change in the economies real output of goods (Y)

38
Q

what does a change in long run aggregate demand cause?

A

it affects the overall price levels but does not effect real output

39
Q

what can policy makers do for the aggregate supply and demand?

A

policy makers who influence aggregate demand can potentially mitigate the severity of economic fluctuations

40
Q

consider all firms experience an increase in their cost of production, how will this impact the aggregate supply curve (both long and short run)?

A

the long run supply curve will not change because there is no change in factors of production or technology, there fore there us no change in the long run aggregate supply curve

the short run aggregate supply curve will decrease because costs increase, leading to expected price increases causing production to decrease (shift left)

41
Q

what is stagflation?

A

the event when an economy is experiencing both rising prices (inflation) and following falling output (stagnation) when both occur it is called stagflation

42
Q

how can stagflation be mitigated?

A

only way to get rid of stagflation is a policy response to stop the decrease in real output

43
Q

what will cause stagflation?

A

the fall in aggregate supply will lead to stagflation

44
Q

how can stagflation be cured?

A

through policy makers rising the aggregate supply curve

45
Q

what caused the origin of the aggregate supply and demand model?

A

it was a product of the Great Depression where economists and policy makers didn’t know what caused the Great Depression or how to deal with it

46
Q

how can monetary supply stabilize the economy?

A

increasing the money supply will increase the short term supply curve

macroeconomics (13 decks)

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