AS

Unit 3 Macro Quiz

Vocab:

  1. Aggregate Demand: demand for all good and services (consumers, businesses, gov, and foreign countries)

  2. Fiscal Policy: Congress/President change taxes, transfer payments, and gov spending

  3. Monetary Policy: Fed Reserve changes amount of money in circulation and interest rate

  4. Shocks: unanticipated changes in economy (+ or - and affect AD or SRAS)

  5. Stagflation: caused by negative supply shocks, combo of high inflation and unemployment

Why does AD slope downward?

  1. Wealth Effect: Price Level and Consumption- higher prices means less purchasing power and therefore less spending

  2. Interest Rate Effect: Price Level and Interest- higher price level means ppl need higher interest rates to get good return on money, higher interest discourages spending and business investment

  3. Foreign Trade Effect: Price Level and Net Exports- when US price level is high, foreigners buy less US goods and US imports more so GDP decreases

-Short-Run: period of time where at least one input price is fixed, like contracts or leases. About 1-2 years

-Long-Run: no fixed elements, can adjust, about 20 years

-Sticky Wage Theory: nominal wages and input costs are slow to adjust (“sticky”)

-What shifts AD?

changes in GDP= C+I+G+Xn

-What shifts SRAS?

anything making it cheaper/more expensive to produce- Input Costs, Productivity (Tech), Gov Policy, Expectations

**In self-adjustment, SRAS shifts first bc suppliers will react to economy first