Untitled Flashcards Set

Flashcards

Aggregate Demand (AD) and Aggregate Supply (AS)

• Effect of Simultaneous Shifts in AD and AS

  • If AD and AS both increase → Output increases, price level impact depends on magnitude.

  • If AD and AS both decrease → Output decreases, price level impact depends on magnitude.

  • If AD increases and AS decreases → Higher price level, output impact depends on magnitude.

  • If AD decreases and AS increases → Lower price level, output impact depends on magnitude.

• Reasons for Shifting AD

  • C (Consumer spending)

  • I (Investment spending)

  • G (Government spending)

  • Xn (Net exports)

• Reasons for Shifting AS

  • Input prices (wages, raw materials)

  • Productivity changes

  • Government regulations/taxes/subsidies

  • Supply shocks (e.g., natural disasters, oil crises)

Key Calculations

• Marginal Propensity to Consume (MPC)

  • MPC = Change in consumption / Change in income

• Multiplier Effect

  • Spending Multiplier = 1 / (1 - MPC)

  • Tax Multiplier = -MPC / (1 - MPC)

• Total Spending from a Purchase

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

Government Fiscal Policy

• Tax Cut Effect on Economy

  • Increases disposable income → Increases consumer spending → Increases AD

• Government Spending Effect

  • Direct increase in AD → Multiplier effect further boosts output

Employment & GDP Relationship

• As Real GDP Increases → Employment Increases

• As Real GDP Decreases → Employment Decreases

Aggregate Demand Components (AD = C + I + G + Xn)

1. Consumption (C) – Household spending

2. Investment (I) – Business spending on capital goods

3. Government Spending (G) – Public sector expenditures

4. Net Exports (Xn = Exports - Imports)

Determinants that Shift AD and SRAS

• AD Shifts: Changes in C, I, G, Xn

• SRAS Shifts: Changes in resource prices, productivity, and government policies

• Effects on Price Level and Output:

  • AD ↑ → Price level ↑, Output ↑

  • AD ↓ → Price level ↓, Output ↓

  • AS ↑ → Price level ↓, Output ↑

  • AS ↓ → Price level ↑, Output ↓

Graphing Basics

• AD Curve: Downward sloping

• SRAS Curve: Upward sloping

• LRAS Curve: Vertical at potential output

Behavior of AD and AS

• AD: Moves due to spending changes

• AS: Moves due to cost/production changes

• Short-Run vs. Long-Run:

  • Short-run: Wages and prices are sticky

  • Long-run: Wages and prices adjust

Long-Run Aggregate Supply (LRAS) and Potential Output

• LRAS represents full employment output

• Shifts in LRAS: Changes in technology, labor force, capital stock

Money Supply and Price Level

• More money supply → Inflation if demand increases too much

• Less money supply → Deflation or slower economic growth

Recession Effects

• Income decreases → Less spending → Lower AD

• Employment decreases → Higher unemployment