Revision 2 - AD&AS

What does aggregate demand show in relation to price level and real GDP?

A negative relationship.

What happens to the aggregate expenditure (AE) curve when there is a fall in the price level?

The AE curve shifts upwards.

What effect does a rise in the price level have on the equilibrium GDP?

It lowers equilibrium GDP.

Why does a rise in the price level lower exports?

It raises the relative price of domestic goods.

How does a rise in price level affect private consumption spending?

It decreases the real value of consumers' wealth.

What does the aggregate demand (AD) curve plot?

The equilibrium level of real GDP for each possible price level.

What does a movement along the AD curve indicate?

A change in equilibrium real GDP following a change in the price level.

What shifts the aggregate demand curve?

Changes in any element of exogenous expenditure.

What is the formula used to measure the magnitude of shifts in aggregate demand?

1/(1-b)(1-t)+m times the shift in exogenous spending.

Why is the short run aggregate supply (SRAS) curve positively sloped?

Unit costs rise with increasing output and rising product prices make it profitable to increase output.

What happens to the SRAS curve when productivity increases or input prices decrease?

It shifts to the right.

What is macroeconomic equilibrium?

When aggregate demand and supply intersect.

What is the effect of an aggregate supply shock on equilibrium real GDP?

It moves GDP along the AD curve, causing price level and output to move in opposite directions.

What does a leftward shift in the SRAS curve cause?

Stagflation, characterized by rising prices and falling output.

What does an inflationary gap imply about actual GDP compared to potential GDP?

Actual GDP is greater than potential GDP.

What happens to unit labor costs during an inflationary gap?

They rise faster than productivity.

What characterizes a recessionary gap?

Actual GDP is less than potential GDP.

How do wages behave in a recessionary gap compared to an inflationary gap?

Wages tend to fall relative to productivity, but the force is weaker than in inflationary gaps.