Chpt 9: An Introduction to Basic Macroeconomic Markets (Cont.)

What does Aggregate Demand (AD) represent?

AD is a downward-sloping curve showing the relationship between the price level and the quantity of domestically produced goods and services purchased by households, businesses, governments, and foreigners.

How is GDP defined?

GDP is the market value of all final goods and services produced within a country in a given period of time.

What does Aggregate Supply (AS) indicate?

AS is the curve showing the relationship between a nation's price level and the quantity of goods supplied by its producers.

What characterizes the short-run Aggregate Supply (SRAS) curve?

The SRAS is an upward-sloping curve attributed to firm expectations about prices and unexpected inflation, incentivizing firms to increase output.

What does the long-run Aggregate Supply (LRAS) curve represent?

The LRAS is a vertical line indicating that output is fixed at the economy's maximum potential, regardless of price levels.

What happens to output in the long-run after firms adjust to unexpected changes?

Output remains the same for all price levels, indicating perfectly inelastic supply.

What is the significance of the Production Possibility Curve (PPC) in relation to LRAS?

The PPC shows the maximum production given efficient use of resources, while LRAS shows the maximum output achieved in the long-run.

What does the intersection of SRAS, AD, and LRAS indicate?

It indicates long-run equilibrium, where the economy is at full employment and producing at its efficient level.

What is an overheated economy?

An overheated economy occurs when short-run output exceeds long-run capabilities, indicating overproduction.

What characterizes a recession or depression in economic terms?

A recession or depression occurs when short-run output is less than long-run potential, leading to underproduction and idle resources.

What is the relationship between short-run equilibrium and long-run potential during a recession?

In a recession, short-run equilibrium output is less than long-run potential, resulting in higher unemployment and unused resources.

What is the expected outcome when the economy is in long-run equilibrium?

The economy achieves its maximum output potential, with all resources utilized efficiently and unemployment at the natural rate.

What does unexpected inflation do to firm behavior?

Unexpected inflation incentivizes firms to increase output to chase higher profits, despite being locked into long-term contracts.

How can we graphically represent a recession or expansion?

By showing shifts in the SRAS or AD curves relative to the LRAS curve.

What is the importance of the price level on the y-axis in economic graphs?

The price level is indexed to 100 to average prices across all goods and services, allowing for clearer economic analysis.

What does the term 'natural rate of unemployment' refer to?

It refers to the level of unemployment consistent with full employment, where all resources are used efficiently.

What is the role of expectations in the upward slope of the SRAS curve?

Expectations about future prices influence firms' supply decisions, contributing to the upward slope of the SRAS curve.

What does it mean when output is at YF on the LRAS curve?

It indicates that the economy is operating at its full potential output level, utilizing all resources effectively.

What is the effect of higher points on the price level index?

Values greater than 100 indicate price increases, while values less than 100 indicate price drops.

What is the significance of the intersection point of SRAS and AD?

It represents short-run equilibrium output, which can be above or below long-run potential depending on economic conditions.

What is the expected outcome of a policy intervention in an overheated economy?

Policy interventions aim to reduce short-run output to align it with long-run capabilities, stabilizing the economy.

How do firms react to unexpected economic shocks in the short-run?

Firms may increase output temporarily to capitalize on higher prices, despite being constrained by long-term contracts.

What is the relationship between AD and GDP?

AD can be represented as real GDP since both measure total spending in the economy.

What does it mean for the economy to be at full employment?

It means that all resources are utilized efficiently, and unemployment is at its natural rate.

What is the significance of the long-run output goal of the economy?

It represents the sustainable level of output that the economy strives to achieve after adjusting to shocks.