Untitled Flashcards Set

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

What happens if both AD and AS increase?

Output increases; the price level impact depends on the magnitude.

What occurs when both AD and AS decrease?

Output decreases; the price level impact depends on the magnitude.

What is the impact if AD increases and AS decreases?

Higher price level; output impact depends on the magnitude.

What occurs if AD decreases and AS increases?

Lower price level; output impact depends on the magnitude.

Reasons for shifting AD include:

C (Consumer spending), I (Investment spending), G (Government spending), Xn (Net exports).

Reasons for shifting AS include:

Input prices (wages, raw materials), productivity changes, government regulations/taxes/subsidies, supply shocks.

What is the formula for Marginal Propensity to Consume (MPC)?

MPC = Change in consumption / Change in income.

What is the formula for the Spending Multiplier?

Spending Multiplier = 1 / (1 - MPC).

What is the Tax Multiplier formula?

Tax Multiplier = -MPC / (1 - MPC).

How is Total Spending from a Purchase calculated?

Total spending = (1 / (1 - MPC)) × Initial spending.

What is the effect of a tax cut on the economy?

Increases disposable income, which increases consumer spending and thus AD.

How does government spending affect AD?

Direct increase in AD, and the multiplier effect further boosts output.

What is the relationship between Employment and GDP?

As Real GDP increases, Employment increases; as Real GDP decreases, Employment decreases.

What comprises Aggregate Demand (AD)?

AD = C + I + G + Xn; where C is consumption, I is investment, G is government spending, and Xn is net exports.

What determines shifts in Aggregate Demand?

Changes in consumer spending (C), investment (I), government spending (G), and net exports (Xn).

What are the characteristics of Short-Run Aggregate Supply (SRAS)?

SRAS shifts due to changes in resource prices, productivity, and government policies.

Effects on Price Level and Output when AD changes:

AD ↑ → Price level ↑, Output ↑; AD ↓ → Price level ↓, Output ↓.

Effects on Price Level and Output when AS changes:

AS ↑ → Price level ↓, Output ↑; AS ↓ → Price level ↑, Output ↓.

Graphical representation of AD Curve

The AD Curve is downward sloping.

Graphical representation of SRAS Curve

The SRAS Curve is upward sloping.

Graphical representation of LRAS Curve

The LRAS Curve is vertical at potential output.

What does the AD curve respond to?

Moves due to changes in spending.

What prompts shifts in the AS curve?

Moves due to changes in cost and production.

Difference between Short-Run and Long-Run in economics

Short-run: Wages and prices are sticky; Long-run: Wages and prices adjust.

What does Long-Run Aggregate Supply (LRAS) represent?

LRAS represents full employment output.

What causes shifts in LRAS?

Changes in technology, labor force, and capital stock.

How does the money supply relate to the price level?

More money supply can lead to inflation if demand increases too much, while less money supply can cause deflation or slower economic growth.

What are recession effects on income and employment?

Income decreases leading to less spending and lower AD; Employment decreases leading to higher unemployment.

Medium of Exchange

An asset that individuals acquire for the purpose of trading goods and services rather than direct consumption.

Store of Value

Holds purchasing power over timeand can be saved or invested.

unit of account

a measure used to set prices and make economic calculations