Macro Economics Chapter 10 Power Point

Question 1

What is the difference between market and aggregate models?

Answer 1

The market model measures physical units whereas the aggregate model measures value.

Question 2

What is the aggregate demand curve?

Answer 2

The curve shows the level of real GDP purchased by everyone at different price levels during a time period, ceteris paribus.

Question 3

What does the horizontal axis measure?

Answer 3

The value of final goods and services included in real GDP measured in base year dollars.

Question 4

What does the vertical axis measure?

Answer 4

It is an index of the overall price level, such as the GDP deflator or the CPI.

Question 5

Why does the aggregate demand curve slope downward to the right?

Answer 5

•Real balances effect•Interest-rate effect•Net exports effect

Question 6

What is the real balances effect?

Answer 6

Consumers spend more on goods and services because lower prices make their dollars more valuable.

Question 7

What is the interest-rate effect?

Answer 7

Assuming fixed credit, an increase in the price level translates through higher interest rates into a lower real GDP.

Question 8

What is the net exports effect?

Answer 8

A higher domestic price level makes U.S. goods more expensive compared to foreign goods, exports decrease, imports increase, decreasing real GDP.

Question 9

Decrease in the price level equals?

Answer 9

Increase in the real GDP demanded.

Question 10

What can cause a shift in the aggregate demand curve?

Answer 10

Consumption, investments, government spending and net exports can change.

Question 11

Increase in C,I, G, (X-M) equals?

Answer 11

Increase in the aggregate demand curve

Question 12

What is the aggregate supply curve?

Answer 12

Shows the level of real GDP produced at different price levels during a time period, ceteris paribus.

Question 13

Why did Keynes assume fixed product prices and wages?

Answer 13

During a deep recession or depression, there are many idle resources in the economy.

Question 14

Why do idle resources mean fixed prices?

Answer 14

Producers are willing to sell additional output at current prices because there are plenty of resources to go around for everyone who wants them.

Question 15

Why do idle resources mean fixed wages?

Answer 15

Unemployed workers willing to work for the prevailing wage diminish the power of workers to increase their wages.

Question 16

What kind of supply curve would explain fixed prices and wages?

Answer 16

A horizontal supply curve

Question 17

Government spending (G) increases and has what effect?

Answer 17

Aggregate demand increases and the economy moves from E1 to E2. Price level remains constant, while real GDP and employment rise.

Question 18

According to Keynes, what will a shift in aggregate demand do?

Answer 18

It will restore a depressed economy to full employment.

Question 19

What is the classical view of the aggregate supply curve?

Answer 19

It is a vertical line at the full employment output.

Question 20

According to the classical economists, where does the economy normally operate?

Answer 20

The economy normally operates at its full employment level.

Question 21

How do the classical economists view prices and costs?

Answer 21

The price level of products and production costs change by the same percentage in order to maintain full employment.

Question 22

Aggregate demand decreases at _____ _______?Unemployment causes a decrease in ________? The economy moves to a level of ____ _____?

Answer 22

full employmentpricesfull employment

Question 23

What are the two types of inflation?

Answer 23

•Cost push•Demand pull

Question 24

What is cost push inflation?

Answer 24

A rise in the general price level resulting from an increase in the cost of production.

Question 25

What is stagflation?

Answer 25

High unemployment and rapid inflation exist simultaneously.

Question 26

What is demand pull inflation?

Answer 26

A rise in the general price level resulting from an excess of total spending.

Question 27

What determines the business cycle?

Answer 27

Shifts in the aggregate demand and aggregate supply curves.

Question 28

What happens when both curves increase?

Answer 28

That depends on how much each increases.

Question 29

Increase in aggregate demand and supply leads to an Increase in ______ _____ and an increase in _______ ________.

Answer 29

real GDPprice level