ECON CH33: Aggregate Demand and Aggregate Supply

AD-AS framework

explore total output and average prices across the economy as a whole

real GDP

What is quantity of output measured by?

GDP deflator

What is price of output measured by?

GDP deflator

the price of a basket containing the many goods and services that we produce

aggregate demand curve

shows the relationship between the price level and the total quantity of output that buyers plan to purchase

lower

A _____ average price level leads buyers to demand a larger quantity of output.

aggregate supply curve

shows the relationship between the price level and the total quantity of output that suppliers collectively produce

higher

A ____ average price level leads suppliers to produce a larger quantity of output.

equilibrium

the only point where the quantity of output demanded is equal to the quantity supplied

time

Macroeconomics signifies trade-offs across ____.

aggregate expenditure

the total amount of goods and services that people want to buy across the whole economy

AE = C + I + G + NX

aggregate expenditure equation

inflation rate

The higher the price level this year, the higher the _____ ___.

raise, aggregate expenditure

Higher real interest rates ____ the opportunity cost of spending, reducing ______ _____.

international trade, wealth and debt effects

What are other economic forces that also contribute to the downward-sloping nature of the aggregate demand curve?

a movement along the aggregate demand curve

changes in the price level

shift in the curve

other changes in spending

raise, reducing

Higher price levels lead the Fed to ____ the real interest rate, ___ the quantity of output demanded.

cut, raising

Lower price levels lead the Fed to ____ the real interest rate, ____ the quantity of output demanded.

increases, right

Higher spending _____ aggregate demand, shifting the curve to the ____.

decreases, left

Lower spending _____ aggregate demand, shifting the curve to the ____.

consumption

increases if people feel more prosperous

investment

increases if it is profitable to expand production

government purchases

increase when policymakers decide to spend more

net exports

increase in response to global factors

aggregate expenditure, aggregate demand curve

Changes in the real interest rate can lead to changes in _____ _____, but only some interest rate changes shift the ____ ___ ____.

higher output leads to higher prices

time of excess demand

lower output leads to lower prices

time of insufficient demand

changes in production costs

cause the aggregate supply curve to shift

input prices, import prices, productivity and the exchange rate

examples of costs that shift the aggregate supply curve

right

A fall in production costs causes the aggregate supply curve to shift to the ____.

left

A rise in production costs causes the aggregate supply curve to shift to the ____.

marginal costs, prices

If the prices of inputs rise, ____ ____ rise and then so do ____.

international shocks

Higher import prices reflect _____ ____.

directly raises the average price level in the US

When US consumers pay higher prices for imported cars, clothes etc…

leads them to raise their prices

When US producers pay higher prices for imported raw materials and intermediate inputs…

lower productivity

means having to buy more inputs to produce the same output

depreciation

leads suppliers to set higher prices, shifting aggregate supply up to the left

appreciation

leads suppliers to set higher prices, shifting aggregate supply down to the right

monetary policy

the process of setting interest rates in an effort to influence economic conditions

inflation-induced response

the Fed cuts the interest rate if they’re worried this is too low

output-induced response

the Fed cuts the interest rate to combat declines in GDP

inflation-induced, output-induced

______ changes do NOT shift the aggregate demand curve, while ______ changes in the interest rate do shift the aggregate demand curve.

fiscal policy

the government’s use of spending and tax policies to influence economic conditions

direct purchases of buildings, income support, unemployment benefits

examples of expansionary fiscal policy examples

change in spending x multiplier

change in GDP equation

multiplier

a measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending

crowding out

_____ ___ of some private spending dampens the overall effect on output.

fairly immediate effect

changes in aggregate demand

can take a while to play out

changes in aggregate supply

different

Initial impact of a shock may be _____ from the longer-term effects.

long-run

a period of time long enough that all businesses have had the chance to adjust their prices and wages as well as adapt to any competing price changes

no effect

In the long run, a change in the average price level has _____ on real variables.

no effect

In the long run, a change in the price level has _____ on the quantity of goods produced.

very-short-run

large changes in output while prices do not adjust at all

quantities

In the very short run, the burden of adjustment falls entirely to ______.

short run

stick prices; upward-sloping aggregate supply curve

medium run

less sticky prices; even steeper aggregate supply curve

sticky prices

prices that adjust sporadically and sluggishly to changes in market conditions

stuck

In the very short run, the price level is ____ at its preexisting level.

cut prices

As time passes in the short run, if insufficient demand, some sellers will __ ____ and vice versa.

more

As time passes in the medium run, if insufficient demand, ____ sellers will cut prices and vice versa.

short and medium run

price adjustment bears more of the adjustment burden

very short run

stick prices fail to adjust

short and medium run

decline in output dissipates

very short run

large fall in output

long run

lower price level persists even after the recession ends