Depreciate: DIMINISH IN VALUE OVER A PERIOD OF TIME

Real: adjusted for INFLATION

3.1:

• Aggregate Demand: the amount of a nation’s output (real GDP) that consumers desire to buy at certain price levels (at possible price levels). 

• The relationship between the price index and the real GDP is INVERSE/NEGATIVE

• When the price level increases, the quantity of real GDP demanded decreases. This is because people don’t want to buy more goods/services at higher prices.

• When the price level decreases, the quantity of real GDP demanded increases. This is because people want to take advantage of the lower prices. 

• Income Effect: when the price of an individual item falls, a consumer’s nominal (constant) income allows for a larger purchase of that item (Ex: the price of rice bags at Costco suddenly decreases. All the Asians are gonna buy as many as possible since the price got lowered)

• Substitution Effect: as the price falls, consumers want to buy more of the good that’s price is lowered compared to the other goods, which may have higher/worse prices. The good that’s price is lowered is now relatively less expensive compared to the other goods, or “substitutes”. (Ex: Think of granola bars. If one brand suddenly becomes cheaper than all the other granola bar brands, then consumers will probably want to buy the less expensive brand compared to the substitutes since the price is lowered. After all, it's all the same, right?)

• Real-Balances Effect: a higher price level REDUCES the purchasing power of the public’s accumulated savings/The real value of assets with FIXED PRICES (Examples: saving accounts, bonds. So like during inflation the purchasing power would decrease)

• Interest-Rate Effect: A higher price level increases the demand for money. Consumers need more money to meet their payrolls. An increase in the price level will lead to an increase in interest rates. 

• Foreign-Purchases Effect: 

  • When the US price level rises relative to foreign price levels, foreigners buy less US goods and Americans buy more foreign goods. Basically, foreign goods are now cheaper and US goods are more expensive. 

• when a change in the price level of one country leads to other countries purchasing more goods from that country. (Ex: there is a change in the price level in France. Basically, when goods from a certain country are cheaper due to a decrease in price level, more foreigners are gonna wanna buy stuff from that country. So in this example, more foreigners are willing to buy French goods.)

• Real Wealth Effect: when consumer income increases, consumers save less and spend more than they had been planning to since their income is now larger. This increase in consumer spending is the wealth effect. 

• Exchange Rate Effect: When a country’s exchange rate increases, net exports will decrease and aggregate expenditure will go down at all prices.

• SRAS: 

  • Short-Run Aggregate Supply

Components of SRAS: 

• Aggregate Output: An increase in Real GDP is accompanied by a change in employment

• Real GDP & Unemployment/Employment:

  • If Real GDP increases, employment increases and unemployment rate falls 

  • If Real GDP decreases, unemployment rates rise

• Aggregate Spending: Consumption, Govt. Spending, Net Exports (Exports-Imports), Gross Private Investment 

• Aggregate Income: Wages, Rent, Interest, Profit 

• Aggregate Price Level: is the GDP deflator & a measure of inflation 

• Aggregate Demand: the demand for all goods and services purchased in product markets 

• Product Markets: the marketplace where all final goods and services are sold to the household and foreign sector 

• Aggregate Demand Components:

  • C (Consumption): demand by consumers for consumer goods 

  • I (Investments): demand by firms for investment goods (capital stock or productive capacity)

  • G (Govt. Spending): demand for goods and services by the government 

  • Xn (Net Exports): demand for US goods and services by foreigners (EXPORTS) 

• As the price level falls, the quantity of aggregate output demanded rises due to LOWER PRICES. (Ex: There is a sudden fall in prices of veggies. The aggregate (total) output (of veggies) demanded by consumers will rise because veggies are now cheaper.)  

• As the price level rises, the quantity of aggregate output demanded decreases due to HIGHER PRICES. (Ex: the price of cherries just rose. Ain’t no one buying them anymore…) 

• An increase in the price level causes a movement up and to the left of a given aggregate demand curve. 

• A decrease in the price level causes a movement down and to the right of a given aggregate demand curve. 

CED (3.1):

• Define the aggregate demand curve: describes the relationship between the price level and the quantity of goods and services demanded by households (consumption), firms (investments), governments (govt. spending), and the rest of the world (net exports).   

• Explain the slope of the aggregate demand curve: the negative slope of the AD curve is explained by the wealth effect, the interest-rate effect, and the exchange-rate effect. 

• Any changes in the components of the aggregate demand curve cause a SHIFT either left/up or right/down.  

3.3:

• Aggregate Supply: the relationship between a nation’s price level and the real domestic output firms produce 

• Immediate Short Run: input & output prices are fixed 

• Short Run: input prices are fixed, but output prices are flexible 

CED (3.3):

• Define the short-run aggregate supply (SRAS) curve: describes the relationship between the price level and the quantity of goods and services supplied in an economy. 

• Explain the slope of the SRAS curve: 

  • upward sloping due to sticky wages and prices. 

  • Any factor that causes production costs to change, such as a change in inflationary expectations, will cause a shift on the SRAS curve. 

  • The SRAS curve increases—in other words, shifts to the right—when input prices or regulations on production decrease. Also, if there is an expectation that either of these changes will occur, the SRAS curve shifts to the right.

  • Increase - right 

  • Decrease: left 

• Explain how movement along the SRAS curve implies a relationship between the price level (and inflation) and unemployment: 

  • An increase in price level is associated with an increase in output (the opportunity for additional profits increases production)

  • More production: employment increases

  • Since the labor force is held constant, unemployment falls 

  • Short-run-tradeoff between inflation and unemployment 

3.4:

• Long-Run Aggregate Supply: input & output prices are flexible 

CED (3.4):

• Define the short run & the long run: 

  • In the long run, prices and wages are fully flexible

  • In the short run, some input prices are fixed 

  • One consequence that comes with the flexibility of prices and wages in LRAS is the lack of long-run-tradeoff between inflation and unemployment. 

• Define the long-run aggregate supply (LRAS) curve: 

  • The LRAS curve corresponds to the PPC because both represent full production ability/maximum sustainable capacity. 

  • Maximum Sustainable Capacity: the total output an economic system will produce over a set period of time if all resources are fully utilized. 

  • The LRAS is vertical at full-employment level of output because in the long run prices and wages fully adjust. 

This would be a shift from A to B because a decrease in personal income taxes means that you would have more of your own income to spend on goods and services (an increase in the consumption category of AD). When the aggregate demand itself rises, we have a shift outward/Shift to the left

Spending by firms is part of aggregate demand. An increase in real interest rates will increase the cost of borrowing for firms. This would lead to a decrease in investment spending, which is a part of aggregate demand. A decrease in purchases by firms shifts the AD curve to the RIGHT. 

A decrease in the price level leads to an increase in the quantity of aggregate output demanded. Now, you are spending less money on the same items, meaning you have more money to spend, which increases real wealth. (ex: if something costed $20 and is now $10, you are getting the same item for a lower price, meaning you save $10, which means now you can spend that $10 on more goods; basically, you are adding to your real wealth when there is a decrease in price level because now you have more leftover money to spend.)