Chapter 10: Aggregate Demand and Aggregate Supply

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Spe
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145063
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Chapter 10: Aggregate Demand and Aggregate Supply
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2012-04-01 14:30:00
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Aggregate Supply Demand
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Chapter 10: Aggregate Demand and Aggregate Supply
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  1. What is the relationship between price level and GDP demand?
    The relationship between price level and GDP demand is inverse/negative

    • - Price level rises
    • - Quantity of GDP demanded decreases

    • - Price level falls
    • - Quantity of GDP demanded increases
  2. What is the Real Balances Effect?
    Inverse relationship between price level and real value (purchasing power)

    A higher price level reduces the purchasing power of the public's savings; the value of assets diminishes

    Higher price level = less consumption spending
  3. What is the Interest Rate Effect?
    Direct relationship between price level and demand for money

    A higher price level increases the demand for money
  4. What is the Foreign Trade Effect?
    Canadian price level rises ---> Foreigners buy fewer Canadian goods ---> Canadians buy more foreign goods ---> Canadian exports fall & Canadian imports rise
  5. Changes in Aggregate Demand:
    What happens with an increase in Aggregate Demand?
    What happens with a decrease in Aggregate Demand?
    • Increase in Aggregate Demand:
    • Amount of goods and services demanded is higher

    • Decrease in Aggregate Demand:
    • Amount of goods and services demanded is lower
  6. What defines a Short Run Aggregate Supply?
    What does the curve look like?
    Prices are fixed but output can vary

  7. What defines the Long Run Aggregate supply?
    What does the curve look like?
    Both input and output prices can vary

  8. What is the Inflationary Gap?

    What is the Recessionary Gap?
    Inflationary Gap:

    The amount by which equilibrium GDP exceeds potential GDP

    Recessionary Gap:

    The amount by which equilibrium GDP falls short of potential GDP
  9. Increase in Aggregate Demand
    What does it cause?
    Explain the shifts.
    • Increase in Aggregate Demand causes INFLATION
    • and POSITIVE GDP GAPS (actual GDP exceeds potential GDP)

    - Increase in Aggregate Demand increases both GDP and Price Level

    • - Increase in Aggregate Demand from AD1 to AD 2
    • - Inflation from P1 to P2
    • - Output increases from GDP f to GDP 1
  10. Decrease in Aggregate Demand
    What does it cause?
    Explain the shifts.
    - Causes Recession, Negative GDP Gaps and Cyclical Unemployment

    If Price level is Downwardly Inflexible:

    • - Decline of aggregate demand from AD 1 to AD 2 moves economy from a to b, and
    • - reduces GDP from GDPf to GDP1

    If price level is Flexible Downward,

    - Decline in Aggregate Demand moves economy from a to c (instead of a to b)

  11. Decrease in Aggregate Supply
    What does it cause?
    Explain the shifts.
    Causes COST-PUSH Inflation

    • - Aggregate supply shifts from AS1 to AS2
    • - Economy moves from A to B
    • - Price Level rises from P1 to P2
    • - Real output declindes from GDPf to GDP2
  12. Increase in Aggregate Supply
    What does it cause?
    Explain the shifts.
    • Causes - full employment
    • - economic growth
    • - price stability

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