Chapter 8

Question 1

long run aggregate supply

Answer 1

is potential GDP: which is the quantity of real GDP supplied when all inputs are fully employed

represents 2 macro performance targets:
1. potential GDP
2. full employment

Question 2

long run aggregate supply curve (LAS)

Answer 2

vertical line at potential GDP
- quantity of potential GDP does not change when the price level changes

Question 3

long run

Answer 3

a period of time long enough for all prices and wages to adjust to equillibrium

Question 4

short run

Answer 4

a period of time where some input prices do not change

Question 5

short run aggregate supply (SAS)

Answer 5

quantity of real GDP macro. players plan to supply at different price levels

• changes in the quantity or quality of inputs shift the LAS and SAS in the same direction
• changes in the price level cause movement along an unchanged SAS

Question 6

law of short run aggregate supply

Answer 6

as the price level rises, aggregate quantity supplied of real GDP increases

Question 7

negative supply shocks

Answer 7

directly increase costs or reduce inputs, decreasing short run aggregate supply and shifting SAS leftward

causes stagflation where there is rising average prices, decreased real GDP and increased unemployment

Question 8

positive supply shocks

Answer 8

directly decrease costs or improve productivity, increasing short run aggregate supply and shifting SAS rightward

causes falling average prices, increased real GDP, full employment

Question 9

3 factors that CHANGE SAS

Answer 9

1. quantity or quality of inputs
2. input prices
3. technology

Question 10

aggregate demand

Answer 10

quantity of real GDP macro players plan to demand at different price levels

Question 11

law of aggregate demand

Answer 11

as the price level rises, aggregate quantity demanded of real GDP decreases (INVERSE)

Question 12

6 factors that CHANGE AD

Answer 12

1. expectations
2. interest rates
3. government spending on products and services and taxes
4. GDP in R.O.W
5. value of canadian dollar
6. price levels

Question 13

demand shocks

Answer 13

changes in factors other than the price level that change AD and shift the AD curve and is affected by the 5 factors

Question 14

negative demand shocks

Answer 14

decease AD and shift leftward

causes a recessionary gap where there is falling average price, increased real GDP, and decreased unemployment

• more pessimistic expectations (I)
• higher interest rates (I or C)
• lower gov spending or higher taxes (G or C)
• decreased GDP in R.O.W (X)
• higher value of Canadian dollar (X and IM)

Question 15

positive demand shocks

Answer 15

increase AD and shift rightward

causes an inflationary gap where there is rising average prices, increased real GDP, and decreased unemployment

• more optimistic expectations (I)
• lower interest rates (I or C)
• higher government spending or lower taxes (G or C)
• increased GDP in R.O.W (X)
• lower value of Canadian dollar (X and IM)

Question 16

what happens in macroeconomic equilibrium

Answer 16

AD matches AS and there is no tendency for change

Question 17

market for loanable funds

Answer 17

where banks coordinate the supply of loanable funds (savings) with the demand for loanable funds (borrowing for investments spending)

the interest rate is the price of loanable funds

Question 18

yes left alone markets self adjust (say)

Answer 18

• long run focus
• is external to the economy
• supply shocks are the most important
• expectations: rational and steady

Question 19

no left alone markets fail often (keynes)

Answer 19

• short run focus
• internal to economy
• demand shocks are the most important
• expectations: based on animal spirits, herd mentality, volatile

Question 20

business supply plans for existing inputs have?

Answer 20

fixed input prices

Question 21

supply plans to increase quantity or quality of inputs cause?

Answer 21

an increase in aggregate supply