Term
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Definition
| A collection of items gathered together to form a total quantity; a sum of things. |
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Term
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Definition
| The total demand for final goods and services (GDP) in the economy at a given time and price level. |
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Term
| Fluctuations in real GDP cause... |
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Definition
| fluctuations in unemployment. |
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Term
| Aggregate demand and aggregate supply model |
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Definition
| Explains short-run fluctuations in real GDP and price level. |
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Term
| In the short-run, real GDP and the price level are determined by... |
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Definition
| the intersection of the AD curve and the SRAS curve. |
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Term
| Fluctuations in real GDP and the price level are caused by... |
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Definition
| SHIFTS in the AD curve or SRAS curve. |
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Term
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Definition
| shows the relationship between price level and the quantity of real GDP DEMANDED by households, firms, and the government. |
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Term
| Short-run aggregate supply curve |
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Definition
| shows the relationship in the short-run between price-level and the quantity of real GDP SUPPLIED by firms. |
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Term
| The AD curve is downward sloping because... |
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Definition
| a fall in price level INCREASES the quantity of real GDP DEMANDED. |
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Term
| Out of the four variables that sum up GDP (C, I, G, NX), which one is unaffected by changes in price level? |
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Definition
| Government spending. They are unaffected by price level changes. They are determined by policy decisions of lawmakers. |
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Term
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Definition
| Consumption (Is affected by what effect?). |
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Term
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Definition
| The difference between the values of assets and debts. |
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Term
| Higher household wealth leads to... |
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Definition
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Term
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Definition
| these assets lose value as price level increases and gain values as price level decreases. |
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Term
| As price level rises, real value of household wealth... |
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Definition
| the real value of household wealth decreases (as _______ rises). |
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Term
| As price level rises, nominal assets lose value, and consequently households... |
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Definition
| Households do not consume as much when _______ rises. This is due to the decline in the real value of their household wealth. |
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Term
| As price level rises, what happens to consumption? |
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Definition
| Consumption decreases as price level rises (based on WEALTH EFFECT). |
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Term
| As price level increases, what happens to investment? |
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Definition
| Investment tends to decrease when _________ rises because interest rates of banks increase (due to the fact that more people are withdrawing in response to the increase in price level--they need more money). |
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Term
| What does a high price level do to net exports? |
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Definition
| NX decreases as ________ increases. Exports become more expensive; imports become less expensive. Foreigners buy their own products and [Americans] also buy their own products (imports). |
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Term
| Price level has what type of relationship with consumption, investment, and net exports? |
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Definition
Inverse relationship. As price level increases, consumption, investment, and net exports all decrease.
GDP DECREASES AS PRICE LEVEL INCREASES! |
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Term
| Price level causes what to happen to the AD and SRAS curve? |
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Definition
| Movements occur due to change in what? |
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Term
| SHIFTS to the AD and SRAS curve occur due to... |
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Definition
| When other variables OTHER THAN price level change, AD and SRAS curves start to ______ rather than a movement occurring along them. |
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Term
| The three variables that SHIFT the AD curve are... |
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Definition
Changes in government policies.
Changes in the expectations of households and firms.
Changes in foreign variables. |
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Term
| Changes in government policies that SHIFT the AD curve include... |
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Definition
Increase in interest rates (LEFTWARD SHIFT).
Increase in government purchases (RIGHTWARD SHIFT).
These two variables fall under the change of ______________ that (shift or move?) the AD curve. |
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Term
| Changes in the EXPECTATIONS OF HOUSEHOLDS AND FIRMS that SHIFT the AD curve include... |
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Definition
As the expectation/optimism of households' future incomes increases, consumption increases (RIGHTWARD SHIFT).
As the expectation/optimism of firms' future profitability increases, investment spending increases (RIGHTWARD SHIFT).
These two variables fall under the change of ______________ that (shift or move?) the AD curve. |
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Term
| Changes in FOREIGN VARIABLES that SHIFT the AD curve include... |
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Definition
The growth rate of domestic GDP increases OVER the growth rate of foreign GDP, resulting in the fall of exports and the overall reduction of net exports (LEFTWARD SHIFT).
An increase in the exchange rate of the US dollar compared to other foreign currencies results in the increase of imports and decrease of exports, hence net exports decreases (LEFTWARD SHIFT).
These two variables fall under the change of ______________ that (shift or move?) the AD curve. |
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Term
| Long run aggregate supply curve is shaped how? |
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Definition
| The long run aggregate supply curve is a vertical line which is not affected by price level. |
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Term
| The long run aggregate supply curve (LRAS) shows |
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Definition
| this curve shows the relationship in the long run between price level and the quantity of real GDP supplied. |
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Term
| The long run aggregate supply curve is a vertical line because... |
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Definition
| Price level has no effect on real GDP in the long run. In the long run, real GDP is affected by the number of workers, capital stock, and available technology. |
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Term
| The short run aggregate supply curve (SRAS) shows |
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Definition
| this curve shows in the short run, the relationship between price level and the amount of real GDP supplied by firms. |
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Term
| The short run aggregate supply curve is upward sloping because |
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Definition
| As price level rises, firms are more willing to supply more goods and services. This results in the SRAS curve to slope (Down or up?) |
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Term
| Firms are more willing to supply goods and services when the price level rises because... |
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Definition
| As the price level rises, profits rise faster than the prices needed to be paid for inputs (wages of workers or prices of natural resources). |
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Term
| Firms are more willing to supply goods and services when the price level increases also because... |
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Definition
| Some firms are slow to update their prices, will experience an increase in sales (due to unchanged, lower prices), and increase production. |
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Term
| The failure of workers and firms to predict the price level in the future results in the upward slope of the SRAS. This is due to three reasons: |
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Definition
1. Contracts make some wages and prices "sticky" - contracts and wages are held constant when agreed upon, but demand for production may increase or decrease.
2. Firms are slow to adjust wages - same as 1 pretty much.
3. Menu costs make some prices sticky - menu costs are the costs to firms of changing prices. Some firms may print menus or catalogs depicting their prices, and if price level changes, they may be unable or unwilling to change those prices listed. Some firms may have fixed, low prices, but will increase production. |
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Term
| 5 variables that shift the SRAS curve: |
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Definition
1. Increase in labor force and capital stock (supply more output as labor force increases; SRAS shifts right).
2. Increase of technological change (as technology increases, productivity increases; SRAS shifts right).
3. Expected changes in FUTURE PRICE LEVEL (SRAS shifts left as workers adjust their wages to increase relative to rising price level).
4. Adjustments of workers and firms to errors in past expectations about the price level (SRAS shifts left as workers' wages increase relative the increasing price level).
5. Unexpected changes in the price of an important natural resource (increase in price of natural resource, cost of producing output rises; SRAS shifts left). |
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