Economics 1500

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Economics 1500
2010-07-09 02:11:24
Aggregate Demand

Chapter 9
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  1. U.S. Great Depression
    • Began 1929 lasted 10 years
    • Output fell 30%
    • Unemployment rose to 25%
    • Led to emphasis on short-run and demand side of economy
  2. Classical Economics
    • Focused on long-run issues
    • "invisible hand"
    • Economy always return to potential output and target employment
    • Laissez-faire
    • Blamed depression
  3. Keynesian Economics
    • Problems of depression requred short-run rather than long-run
    • Adjustments to equilibrium for single market and aggregate economy are different
  4. Keynesian Economics
    • Equilibrium income fluctuates
    • Paradox of thrift: long run-saving leads to investment and growth
    • short run-saving lead to decrease in spending, output, employment
  5. Aggregate Demand Curve
    Relates changes in the price level with changes in aggregate expenditures, which are consumption, investment, gov spending and net exports.
  6. Short-Run Aggregate Supply Curve
    Shows how a shift in AD affects the price level and real output in short-run
  7. Long-Run Aggregate Supply Curve
    shows output that an economy can produce at full employment of labor and capital
  8. Shifts in AD Curve
    • Foreign Income
    • Exchange Rates
    • Expectations
    • Distribution of Income
    • Government AD Management Policies
    • Fiscal Policy
    • Monetary Policy
  9. Short Aggregate Supply Curve to Shift
    • Input prices
    • Expectations
    • Sales and excise taxes
    • Productivity
    • Import Prices
  10. Long Aggregate Supply Curve
    • independent of level of price level
    • depends on potential output
    • Depends on capital, resources, growth-compatible insititutions, technology, and entrepreneurship
  11. Why a falling price level increases aggregate expenditures
    • Wealth effect
    • interest-rate effect
    • international effect
  12. Wealth effect
    a fall in the price level will make holders of money and of other finanical assets richer, so they buy more
  13. INterest Rate Effect
    the effect that a lower price level has on investment expenditures thru the effect that a change in the price level has on interest rates
  14. International effect
    as price level falls net exports will rise
  15. Multiplier effect
    amplification of initial changes in expenditures
  16. Recessionary Gap
    amount by which equilbrium output is below potential output
  17. Inflationary Gap
    aggregate expenditures above potential output that exist at current price level
  18. Fiscal Policy
    deliberate change in either government spending or taxes to stimulate or slow down economy
  19. Expansionary Fiscal Policy
    increase the deficit by decreasing taxes or increasing gov. spending
  20. Contractionary Fiscal Policy
    decrease the deficit by increasing taxes or decreasing govern. spendingMacro Policy more complicated thant it looks
  21. Macro policy is more complicated than it looks
    • 1. implementing fiscal policy is slow legislative process
    • 2. have no way of measuring potential output
  22. Most economists agree that fiscal policy
    cannot be used to fine tune the economy
  23. An increase in aggregate demand
    does not change potential output
  24. During Reagan Administration tax rates were reduced significantly, while federal defense spending rose by 80 percent. The effect of these policies on the AD curve:
    Shows a shift to the left
  25. An economy's resources
    can be over-utilized, but only temporarily
  26. Contractionary fiscal policies are most appropriate when the economy is in
    an inflationary gap
  27. If actual output exceeds potential output, the economy
    is experiencing an inflationary gap
  28. The rapid development of internet technologies during 1990s allolwed businesses to produce goods and services cheaper than. We would show this change in the aggregate-demand/aggregate-supply model by moving the aggregate
    supply curve down (to the right)
  29. During 2005-2007, oil prices rose rapidly and reached historic highs. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model
    because oil is an important input in many production processes, the higher prices would shift the short-run aggregate supply curve up (to the left.)
  30. Keynes believed equilibrium ouput (income) was:
    not fixed at the economy's potential income
  31. A fiscal policy that increases gov. spending or cuts taxes is most appropriate when economy is in
    a recessionary gap
  32. According to short-run aggregate supply curve, the response to an increase in aggregate demand is an increase in:
    Both production and prices
  33. The classical economists argued that
    if unemployment occurs it will not persist because wages and prices iwll fall
  34. Expansionary monetary policy will likely
    shift the AD curve out to the right
  35. An increase in the aggregate demand curve will in the long run change
    the price level but not output
  36. In 2009 the dollar depreciated sharply against foreign currencies. The dollar's depreciation should result in
    an increase in U.S. exports and an outward shift of the U.S. aggregate demand curve
  37. The short-run aggregate supply curve is most likely to shift dow (to the right) if
    input prices fall
  38. Fiscal policy is
    difficult to enact but may help restore full employment
  39. Under what circumstances is it most clear the government should pursue neighter fiscal nor monetary policy
    there is no inflation and the unemployment rate equals the target rate of unemployment
  40. What effect occurs because as prices fall, people become richer, so they buy more?
    wealth effect