Econ chapter 13

aggregate demand(AD) and aggregate supply(AS) model
enables us to explain

short-run changes in real GDP and price level.

The aggregate demand curve
shows the relationship between

the price level and the level of planned aggregate expenditures by households, firms, and the government.

The short-run aggregate supply curve shows the relationship in..

the short run between the price level and the quantity of real GDP supplied by firms.

The long-run
aggregate supply curve shows the relationship in..

the long run between the price level and the quantity of real GDP supplied.

The four components of aggregate demand are..

consumption (C), investment (I), government purchases (G), and net exports (NX).

AD curve is downward sloping
because

a decline in the price level causes consumption, investment, and net exports to increase.

If the
price level changes but all else remains constant, then

The demand curve will stay constant and the economy will move up or down it

The variables that cause the aggregate demand curve to shift are divided into three
categories:

changes in government policies, changes in the expectations of households and firms, and changes in foreign variables.

monetary policy involves

the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.

When
the Federal Reserve takes actions to change ________, then consumption and investment spending will
change, shifting the aggregate demand curve.

Interest rates

Fiscal policy

involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Changes in federal taxes and
purchases ________ the aggregate demand curve.

shift

long-run aggregate supply curve is a

vertical line because in the long run, real GDP is always at its potential level and is unaffected by the price level.

The
short-run aggregate supply curve slopes upward because

workers and firms fail to accurately predict the future price level.

The three main explanations of why this failure results in an upward-sloping aggregate
supply curve are that

(1) contracts make wages and prices "sticky," (2) businesses often adjust wages slowly, and (3) menu costs make some prices sticky

Menu costs are

the costs to firms of changing prices on menus or catalogs

If the price level changes but all else remains constant, then

the economy will move up or down a stationary aggregate supply curve.

If any variable other than the price level changes, then

the aggregate supply curve will shift.

The aggregate supply curve shifts as a result of

increases in the labor force and capital stock, technological change, expected changes in the future price, adjustments of workers and firms to errors in past expectations about the price level, and unexpected changes in the price of an important raw material.

supply shock

is an unexpected event that causes the short-run aggregate supply curve to shift.

In long-run macroeconomic equilibrium, the aggregate
demand and short-run aggregate supply curves do what?

intersect at a point on the long-run aggregate supply curve

In short-run macroeconomic equilibrium, the aggregate demand and short-run aggregate supply curves do what?

intersect at a point off the long-run aggregate supply curve.

An automatic mechanism drives the
economy to

long-run equilibrium.

If short-run equilibrium occurs at a point below potential real GDP then what would we do to bring it back?

drop wages and prices and the SRAS shifts to the right until potential GDP is restored.

If short-run equilibrium occurs at a point beyond potential real GDP, then

wages and prices will rise, and the short-run aggregate supply curve will shift to the left until potential GDP is restored.

Stagflation

is a combination of inflation and recession, usually resulting from a supply shock.

To make the aggregate demand and aggregate supply model more realistic, we need to make it dynamic
by incorporating three facts that were left out of the basic model:

(1) Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right; (2) during most years, aggregate demand shifts to the right; and (3) except during periods when workers and firms expect high rates of inflation, the aggregate supply curve shifts to the right.

The dynamic aggregate demand and aggregate
supply model allows us to analyze

macroeconomic conditions, including the beginning of the 2007-2009 recession.

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Econ chapter 13

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aggregate demand(AD) and aggregate supply(AS) model
enables us to explain

short-run changes in real GDP and price level.

The aggregate demand curve
shows the relationship between

the price level and the level of planned aggregate expenditures by households, firms, and the government.

The short-run aggregate supply curve shows the relationship in..

the short run between the price level and the quantity of real GDP supplied by firms.

The long-run
aggregate supply curve shows the relationship in..

the long run between the price level and the quantity of real GDP supplied.

The four components of aggregate demand are..

consumption (C), investment (I), government purchases (G), and net exports (NX).

AD curve is downward sloping
because

a decline in the price level causes consumption, investment, and net exports to increase.

If the
price level changes but all else remains constant, then

The demand curve will stay constant and the economy will move up or down it

The variables that cause the aggregate demand curve to shift are divided into three
categories:

changes in government policies, changes in the expectations of households and firms, and changes in foreign variables.

monetary policy involves

the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.

When
the Federal Reserve takes actions to change ________, then consumption and investment spending will
change, shifting the aggregate demand curve.

Interest rates

Fiscal policy

involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Changes in federal taxes and
purchases ________ the aggregate demand curve.

shift

long-run aggregate supply curve is a

vertical line because in the long run, real GDP is always at its potential level and is unaffected by the price level.

The
short-run aggregate supply curve slopes upward because

workers and firms fail to accurately predict the future price level.

The three main explanations of why this failure results in an upward-sloping aggregate
supply curve are that

(1) contracts make wages and prices "sticky," (2) businesses often adjust wages slowly, and (3) menu costs make some prices sticky

Menu costs are

the costs to firms of changing prices on menus or catalogs

If the price level changes but all else remains constant, then

the economy will move up or down a stationary aggregate supply curve.

If any variable other than the price level changes, then

the aggregate supply curve will shift.

The aggregate supply curve shifts as a result of

increases in the labor force and capital stock, technological change, expected changes in the future price, adjustments of workers and firms to errors in past expectations about the price level, and unexpected changes in the price of an important raw material.

supply shock

is an unexpected event that causes the short-run aggregate supply curve to shift.

In long-run macroeconomic equilibrium, the aggregate
demand and short-run aggregate supply curves do what?

intersect at a point on the long-run aggregate supply curve

In short-run macroeconomic equilibrium, the aggregate demand and short-run aggregate supply curves do what?

intersect at a point off the long-run aggregate supply curve.

An automatic mechanism drives the
economy to

long-run equilibrium.

If short-run equilibrium occurs at a point below potential real GDP then what would we do to bring it back?

drop wages and prices and the SRAS shifts to the right until potential GDP is restored.

If short-run equilibrium occurs at a point beyond potential real GDP, then

wages and prices will rise, and the short-run aggregate supply curve will shift to the left until potential GDP is restored.

Stagflation

is a combination of inflation and recession, usually resulting from a supply shock.

To make the aggregate demand and aggregate supply model more realistic, we need to make it dynamic
by incorporating three facts that were left out of the basic model:

(1) Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right; (2) during most years, aggregate demand shifts to the right; and (3) except during periods when workers and firms expect high rates of inflation, the aggregate supply curve shifts to the right.

The dynamic aggregate demand and aggregate
supply model allows us to analyze

macroeconomic conditions, including the beginning of the 2007-2009 recession.

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