Studied by 0 people
Looks like no one added any tags here yet for you.
What happens to unemployment during recessions
It rises
Aggregate means
total
aggregate demand
The total demand for final goods and services in an economy
Aggregate demand formula
AD = Consumption + investment + government spending + net exports
Three reasons for negative relationship between the quantity of aggregate demand and price level are
The wealth effect, interest rate effect, international trade effect
Wealth effect
The change in the quantity of aggregate demand that results from wealth changes due to price-level changes
Wealth
the net value of one’s accumulated assets
Interest rate effect
Occurs when a change in the price level leads to a change in interest rates, then eventually the quantity of aggregate demand
If price levels rise, how does this affect savings?
Savings DECREASE, interest rate increases, investment decreases
International trade effect
Occurs when a change in the price level leas to a change in the quantity of net exports demanded
What is the Y axis of AD-AS model
Price level
What is the X axis of AD-AS model
Real GDP
Consumption is influenced by:
Changes in real wealth, general expectations about the future, changes in taxes
Investment shifts when
decision-makers at firms decide to increase or decrease spending on capital goods
Investment is affected by
interest rates, investor confidence, quantity of money in the economy
Net exports shift in response to…
Changes in foreign income AND the value of the US dollar
An increase in the value of the dollar leads to …
a decline in net exports
As nation’s become wealthier, what happens to net exports
They INCREASE
Real wealth increase leads TO
an increase in AD
Expected future income leads to
an increase in AD
An increase in taxes leads to
A decrease in AD
AN increase in business firm confidence leads to
An increase in AD
An increase in interest rates leads to
A decrease in AD
An increase in the quantity of money leads to
An increase in AD
An increase in federal government spending leads to
An increase in AD
An increase in FOREIGN INCOME leads to
An increase in AD
an increase of the value of a dollar leads to
a decrease in AD
a MOVEMENT along the AD curve is due to
A shift in the price level
Long-run
A period of time sufficient for all prices to adjust
Is long run aggregate supply affected by a change in price
NO
LRAS changes when
a nation’s ability to produce output changes
LRAS changes because of changes in these factors
resources, technology, institutions
Short-run
Period of time in which some prices have not yet adjusted
Why is there a positive relationship between the price level and the quantity of AS in the short run
Sticky input prices, menu costs, money illusion
Why are resource prices sticky
They are often set in place by a written contract
Why are output prices flexible
They are easy to change by the company
menu costs
The costs of changing prices
money illusion
when people interpret nominal changes in wages or prices as real changes
factors that shift the short run AS curve
changes in resource prices, expectation prices, or supply shocks (events that change a firm’s production costs
Long run equilibrium
AD = SRAS = LRAS
