Feb 5 & 10 Flashcards
(39 cards)
where does macroeconomic equilibrium occur?
at the intersection of the AD and AS curves
an increase in P does what to private-sector wealth?
reduces it
- reduction in desired consumption
- downward shift in AE curve
effect of increase in P on net exports?
NX function shifts downwards
causes a further downward shift in the AE curve
how does a fall in P affect private sector wealth and NX?
increases private sector wealth
moves NX (X - IM) up
wealth effect: reduction in desired consumption
a fall in P raises the REAL VALUE of MONEY HOLDINGS
much of private sector’s total wealth = held in form of assets with a fixed nominal value
much of private sector’s wealth is held in form of assets with…
a FIXED nominal value
ie. money > what can money buy? depends on the prices
an INCREASE in P REDUCES the real value of money holdings (have to pay more for the same thing)
a FALL in P RAISES the real value of money holdings
looking at our AE function, explain why increase in P shifts the AE function down
AE = (a + I + G + X) + [b (1 - t) - m] Y
Prices affect a and X
a: increased prices mean less consumption so a falls
X: if prices in our economy increase, our goods become less attractive in the international market, so X falls
2 channels through which an increase in prices shifts AE down
- constant a: consumption
^ higher prices = less consumption
- X: exports
^ higher prices = lower exports
wealth effect in a nutshell
a decrease in consumption because of an increase in prices
aggregate demand (AD) curve relates…
relates equilibrium real GDP to the price level
for any given P, the AD curve shows…
the level of real GDP for which desired AE equals actual GDP
what causes movements along the AD curve?
changes in the price level
as the price level rises, what happens to the AE curve and the AD curve?
the AE curve shifts down (because of effects on a and X)
and the economy moves upward and left along the AD curve to meet the new equilibrium
2 reasons why the AD curve is negatively sloped
- fall in price level leads to rise in private sector wealth - this increases desired consumption and thus leads to an increase in equilibrium GDP
- a fall in price level (for given exchange rate) leads to a rise in net exports and thus leads to an increase in equilibrium GDP
any shock that increases equilibrium GDP at a given price level…
shifts the AD curve to the right
what does the horizontal shift of the AD curve equal?
the simple multiplier times the change in autonomous spending
does the AD curve say anything about whether producers want to produce that income?
no
it says nothing about whether producers would want to produce that income
only says that if it’s produced, purchasers will be willing to buy it
the AS curve relates…
the PRICE LEVEL to
the QUANTITY OF OUTPUT that firms would LIKE TO PRODUCE and SELL
AS curve is drawn for a given…
- level of technology
- set of factor prices
as unit costs rise with output, firms will produce more output only…
only if prices increase
AS curve is UPWARD SLOPING
what happens to slope of AS curve as output rises?
slope increases
when output is low, firms typically have EXCESS CAPACITY so costs don’t rise as fast
but when output is nearer Y*, costs RISE as output rises, so firms need higher prices
what causes the AS curve to shift up?
anything that increases firms’ costs
ie. increased factor prices
ie. more expensive technology
why is the AS curve upward sloping?
because as unit costs rise with output, firms will produce more output only if prices increase
where is demand behaviour consistent with supply behaviour?
only at the intersection of the 2 curves
E0 is the macroeconomic equilibrium
