Econ 204- Chapter 8

Front 1

Classical theory

Back 1

Before Great depression. The economy is self-adjusting. Laissez faire- doctrine of leave it alone no intervention. Flexible prices and wages. Says law.

Front 2

Say's Law

Back 2

supply creates its own demand.

Front 3

Keynesian Theory

Back 3

Inherently unstable economy
government intervention is needed.

Front 4

Aggregate Demand

Back 4

The total quantity of output (real GDP) demanded at alternative price levels in a given time period.

Front 5

Aggregate demand curve

Back 5

downward sloping. Illustrates how the real value of purchases varies with the average level of pricesl.

Front 6

Why downward sloping

Back 6

Real balances effect, foreign-trade effect, interest-rate effect.

Front 7

Real-balances effect

Back 7

how many goods and services can you buy? depends on price. Inflation decreases purchasing power. Cheaper prices make dollar more valuable. The real value of money is measured by how many goods and services each dollar will buy.

Front 8

Foreicgn trade effect

Back 8

downward slope. changes in imports andexports. buying domestic or foreign, people consider relative prices.

Front 9

Interest rate effect

Back 9

Changes in price level affect amount of money people need to borrow. at lower price levels, consumer borrowing needs are smaller.

Front 10

Aggregate Supply

Back 10

upward sloping and curved/ Real value of output(real GDP) producers are willing and able ot bring to the market at alternative price levels

Front 11

Upward Slope of the Aggregate Supply Curve

Back 11

Profit effects and Cost effects

Front 12

Profit effects

Back 12

changing price levels will affect the profitability of supplying goods. If price level declines, profits tend to drop. We expect the rate of output to increase when the price level rises. Wages are resistant to change, therefore output is changed instead of wages etc.

Front 13

Cost effect

Back 13

upward slope of demand is explained by rising costs. Even if base wages are constant, there are costs that producewrs will have to pay, such as overtime to produce more. All these cost pressures will make producing output more expensive. Producers will be willing to supply additional output only if prices rise atleast as fast as costs. Cost pressures are minimal at low rates of output but intense as the economy approaches capacity. Dominates in the longrun

Front 14

Aggregate supply and demand curves summarize the market activity of the whole (macro) economy

Back 14

summarize the market activity of the whole (macro) economy, instead of describing behavior of buyers and sellers in a single product market.

Front 15

2 potential problems of Macro equilibrium

Back 15

1. Undesirability
2. Instability

Front 16

macro equilibrium

Back 16

unique combo of prices and output compatible with both buyers and sellers intentions

Front 17

Undesirability

Back 17

The equilibrium price or output level may not satisfy our macroeconomic goal. Equilibrium output may be lower than full employment output. .. or inflation?

Front 18

Instability

Back 18

AS and AD curves are always shifting, whenever the behavior of buyers and sellers change!

Front 19

Aggregate Supply Shifts

Back 19

Almost anything that changes costs of production in a wide range of US industries. Example oil prices incrlease, directly increase the production kin a wide range of industries, AS curve shifts to the left

Front 20

Aggregate Demand shifts

Back 20

changes in consumer behavior, firms' willingess to invest, changes in government spending.

Front 21

Multiple shifts

Back 21

Business cycles result from recurrent shifts in AD and AS.

Front 22

Competing theories of Short run instability

Back 22

Keynesian theory, Monetary theory. Both emphasize the potential of AD shfits to alter macro outcomes.

Front 23

Keynes theory

Back 23

-Deficiency in spending would tend to depress the economy. -Leaves goods unsold and production capacity unused. - Government should increase spending. Inadequate AD would casue persistently high unemployment.

Front 24

Monetary Theory

Back 24

If credit isnt available or is too expensive, consumers wont be able to buy as many cars homes, other expensive products. Tight money may decrease investments in business. An increase in the money supply and or lower interest rates may help shift the AD curve into desired postioint.

Front 25

Supply side theory

Back 25

Unwillingness of producers to supply goods at current prices due to: greed, rising costs, resource shortages, regulations and taxes, or inadequate investment in infrastructure(roads, sewer etc)

Front 26

Long-run self adjustment

Back 26

Classical theory. Aggregate Supply is vertical in long run. A decrease in AD is only a temporary problem.

Front 27

Keynes

Back 27

In the long-run we are all dead. Short Run is important