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20 Cards in this Set
- Front
- Back
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Aggregatedemand curve |
the relationshipbetween the aggregate price level andthe quantity of aggregate output demandedby households, businesses, the government, andthe rest of the world. |
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Why does the AD curve slope downward?) |
Thewealth effect and theinterest rate effect |
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Thewealth effect |
A higheraggregate price level reduces thepurchasing power of households’ wealth and reducesconsumer spending |
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Theinterest rate effect |
Ahigher aggregate price level makeshouseholds hold more money and leads to a rise in interest rates (andafall in investment spending and consumer spending). |
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The aggregate demand curve shifts because ofchanges in |
expectations.wealth.sizeof the existing stock of physical capital.governmentpolicies (Fiscal policyMonetary policy) |
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Whydoes the SRAS curve slope upward? |
Because nominal wagesare sticky in the short run |
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Nominal wage |
the dollaramount of the wage paid. |
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Stickywages |
nominal wagesthat are slow to fall even in the face of high unemployment and slow to riseeven in the face of labor shortages |
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How do sticky wages affect SRAS? |
Profitper unit= price per unit − production cost per unit. A higheraggregate price level leads to higher profits and increased aggregate output inthe short run. |
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The SRAScurveshifts because ofchanges in |
Commodityprices.Nominalwages.Productivity. |
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The SRAScurveshifts RIGHT because of a(n): |
decrease in commodity prices. decrease in nominal wages.increase in productivity |
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The SRAScurveshifts LEFT because of a(n): |
increase in commodity prices. increase in noninal wages.decline in productivity |
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long-runaggregate supply curve shows |
the relationship between the aggregate price levelandthe quantity of aggregate outputsupplied that would exist if all prices,including nominal wages, were fully flexible |
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Potentialoutput |
the level of realGDP the economy wouldproduceifall prices, includingnominal wages, were fully flexible. |
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stagflation |
the combination of inflation and falling aggregate output that comes with a negative supply shock. |
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Recessionarygap |
When aggregateoutput is below potential output |
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Inflationarygap |
When aggregate output is abovepotential output |
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Outputgap |
the % difference between actualaggregate output and potential output |
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Stabilizationpolicy |
the useof government policy to reduce the severity of recessions and rein inexcessively strong expansions. |
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Negative supply shockspose a policy dilemma |
To stabilize aggregate output requiresincreasingaggregate demand. This will leadto inflation. Butto stabilize prices requiresreducingaggregate demand. This will deepenthe output slump |
