Module 14.2: Aggregate Demand and Supply Flashcards
What are the factors of the aggregate demand curves?
Components of GDP:
1) Consumption
2) Investment
3) Government
4) Net Exports
What is the IS curve?
illustrates the negative relationship between real interest rates and real income for equilibrium in the goods market. As real interest rates increase, real aggregate income decreases
What is the LM curve?
illustrates the positive relationship between real interest rates and income consistent with equilibrium in the money market. Higher real interest rates result in higher income.
Explain what happens to savings and income when interest rates are reduced?
decrease savings, increase investment by firms and increase income given the fundamental relationship
(S-I) < (G-T) + (X-M)
What does higher interest rates do to real money balances?
Reduces the balance of real money people want to hold, so an increase in interest rate comes with higher income.
What does the intersection point of the IS and LM curve represent?
Levels of real interest rate and income that are consistent with equilibrium between income and expenditure and equilibrium between real money supply and real interest rate.
What does the aggregate demand curve illustrate?
Shows the relationship between the quantity of real output demanded and the price level.
What does the aggregate supply curve represent?
represents the relationship between the price level and the quantity of real GDP supplied, when all other factors are kept constant.
Why is the VSRAS curve perfectly elastic?
firms will adjust output without changing price by adjusting labor hours and intensity of use of plant and equipment in response to changes in demand.
Why does the SRAS curve slope upward?
some input prices will change as production is increased or decreased.
Why is the LRAS perfectly inelastic?
in the long run, input prices change proportionally to the price level, so the price level has no long run effect on aggregate supply.
What are the 8 factors that can shift the aggregate demand curve to the right or left?
1) Increase in consumers’ wealth
2) Business expectations
3) Consumer expectations of future income
4) High capacity utilization
5) Expansionary monetary policy
6) Expansionary fiscal policy
7) Exchange rates
8) Global Economic growth.
What are the 5 factors that can shift the short run aggregate supply curve?
1) Labor productivity
2) Input prices
3) Expectations of future output prices
4) Taxes and government subsidies
5) Exchange Rates
What are the 4 factors that can cause a shift int he long run aggregate supply curve?
1) Increase in the supply and quality of labor
2) Increase in the supply of natural resources
3) Increase in the stock of physical capital
4) Technology
What is equilibrium in the goods market? what is the formula?
What does an increase in come do for (s-i), (g-t) + (x-m)?
(s - i) = (g - t) + (x - m)
increase in income results in increase of (s-i), decrease of (g-t) + increase of (x-m)
