chapter 23

Question 1

aggregate demand - aggregate supply model

Answer 1

• variable price output model
• allows both price level and level of real GDP to change
• short run instead of immediate short run

Question 2

aggregate demand

Answer 2

• curve showing amounts of a nations real GDP that buyers collectively desire to purchase at each level
• downward sloping - decrease in price level, increase in Qd

Question 3

why inverse relationship between price level (P) and output (Y)

Answer 3

• changes in consumption
• changes in investment
• net exports

Question 4

change in consupmtion on price level and otput

Answer 4

• and increase in price level reduces the real value of money and makes consumers poorer (purchasing power decreases, decrease spending)
• consumption decreases

Question 5

changes in investment on price level and output

Answer 5

• as price increases, households need to hold more money
• put less in banks, buy fewer bonds, lend less
• drives interest rates up
• as interest rates increases, firms borrow less and households are discouraged to borrow
• investment decreases

Question 6

net exports on price level andoutput

Answer 6

• as P increases (relative to foreign prices), foreigners buy fewer canadian goods and services (and canadains buy more foreign goods)
• exports decline, imports rise

Question 7

the link between AD and AE

Answer 7

• downward sloping AD can be derived from AE by allowing price level to change and observing effect it has on AE and eqm output
• change in price level shown by a shift in AE curve shift in AE curve

Question 8

desired AE and the price level

Answer 8

• an increase in P leads to a decrease in C (or I)
• shown by a shift downward on AE curve from AE0 to AE1
• eqm chanes from E0 to E1 and real GDP falls from Y0 to Y1

Question 9

derivation of the AD curve

Answer 9

• start at price level P0 - at this price have given AE curve on graph, can determin eqm output Y0
• represent combo of P0 and Y0 on graph 2
• if price rises: AE shifts down, new eqm output which is lower and at a higher price level –> now have AD curve

Question 10

shifts in the AD curve

Answer 10

• any change that cuases the AE curve to shift will also cause the AD curve to shift (other than price level)

Question 11

AD shifts for a given price level

Answer 11

• increase in autonomous aggregate expenditure shifts AE curve up and aD curve right
• fall in autonomous aggregate expenditure shifts AE curve down and AD curve left

Question 12

simple multiplier shifts in AD curve

Answer 12

• a change in autonomous spending (G, X, I) will shift both AE and AD curve
• size of horizontal shift of AD curve is equal to the simple multiplier x the increase in AE

Question 13

aggregate supply

Answer 13

• a curve showing the relationship between a nation’s price level of output (P) and the amount of real GDP that firms produce

Question 14

aggregete supply in the immediate short run

Answer 14

both input and output prices are fixed, its flat, producers will supply whatever the quantity of real output is demanded at current price level

Question 15

aggregate supply in the short run

Answer 15

• input prices are fixed bu output prices can vary, it is upward sloping, given fixed resource prices, higher output prices raise firm’s profits and encourage them to increase their output levels

Question 16

AS in the long run

Answer 16

• input prices and output prices can vary
• vertical, as the quantity of output supplied depends on the economy’s quantities of labour, capital and resources and technology for turning inputs into outputs (independent on price level)

Question 17

why does the AS slop up?

Answer 17

• as output decreases, less efficient standby plants may have to be used and less efficient workers may have to be hired, while existing workers may have to be paid overtime for additional wor
• unit cost increases
• the higher the level of output, the faster the unit cost tends to rise
• AS curve becomes steeper as output rises

Question 18

what causes shifts in the AS curve

Answer 18

• caused by exogenous forces: AS shocks
• a rise in factor prices shifts curve left (ex. cost of labour)
• improvement in technology causes shift right (ex. computer use)
• increase in productivity shifts right (ex. better educated workerS)
• change in legal environment

Question 19

shifts in the AS curve

Answer 19

• a change in any factors other than the price level

- lower costs of production will shift right

Question 20

macroeconomic eqm

Answer 20

• eqm price level and amount of real output are determined at the intersection of the short run AS and AD curves

Question 21

increase in AD change in eqm output (assume full employment)

Answer 21

• demand pull inflation
• households increase spending, AD increases, aggregate output increases, some effect dissipated in inflation (price level increases)

Question 22

decreases in AD change in eqm output (assume full employment)

Answer 22

• recession
• households decrease spending
• AD decreases
• if price sticky then greater decrease in GDP compared to price level that can change

Question 23

effect of increase in AS

Answer 23

• effect of any shift in AD ill be divided btwn change in output and price level
• steeper the AS curve, greater the price effect and smaller the output effect

Question 24

decrease in AS on eqm

Answer 24

• cost push inflation
• ex. price of oil increases
• higher prices would spread through economy driving up production and distribution costs on many goods
• price level increase (inflation), GDP decreases

Question 25

increase in AS on eqm (full time employment)

Answer 25

- can reach full employment and strong economic growth and price stability if productivity driven increases are sufficient to balance growing AD

Question 26

AS shock

Answer 26

- cause the price level and real GDP to change in opposite directions - negative shock shifts AS curve left and rise in price shifts AE down

Question 27

multiplier effect

Answer 27

- increase in I cuases AD to shift right | - multiplier changes with change in P