Econ Chapter 7

Front 1

Aggregate Demand

Back 1

The quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus

Front 2

Aggregate Demand Curve

Back 2

A curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus.

Front 3

What are the three reasons that the AD curve is downward sloping?

Back 3

The Real Balance Effect, The Interest Rate Effect, and The International Trade Effect.

Front 4

The Real Balance Effect

Back 4

The change in the purchasing power of dollar-denominated assets that results from a change in the price level.

Front 5

Monetary Wealth

Back 5

The value of a person's monetary assets.

Front 6

Purchasing Power

Back 6

The quantity of goods and services that can be purchased with a unit of money. Purchasing power and the price level are inversly related.

Front 7

Interest Rate Effect

Back 7

The changes in household and business buying as the interest rate changes.

Front 8

International Trade Effect

Back 8

The change in foreign sector spending as the price level changes.

Front 9

Wealth

Back 9

The value of all assets owned, both monetary and nonmonetary.

Front 10

Exchange Rate

Back 10

The price of one currency in terms of another currency.

Front 11

Appreciation

Back 11

An increase in the value of one currency relative to other currencies.

Front 12

Depreciation

Back 12

A decrease in the value of one currency relative to other currencies.

Front 13

Aggregate Supply

Back 13

The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus.

Front 14

Short-Run Aggregate Supply (SRAS) Curve

Back 14

A curve that shows the quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus.

Front 15

Menu Costs

Back 15

The costs of changing prices.

Front 16

Short-Run Equilibrium

Back 16

-The condition that exists in the economy when the quantity demanded of Real GDP equals the (short-run) quantity supplied of Real GDP.

-Where aggregate demand curve intersects short-run aggregate supply curve.

Front 17

Natural Real GDP

Back 17

The Real GDP that is produced at the natural unemployment rate. The Real GDP that is produced when the economy is in long-run equilibrium.

Front 18

Long-Run Aggregate Supply (LRAS) Curve

Back 18

The LRAS curves is a vertical line at the level of Natural Real GDP. It represents the output the economy prudces when wages and prices have adjusted to their final equilibrium levels and neither producers nor workers have any relevant misperceptions.

Front 19

Long-Run Equilibrium

Back 19

-The condition that exists in the economy when wages and prices have adjusted to their final equilibrium levels and neither producers nor workers have an relevant misperceptions.

-At intersection of AD and LRAS curves.

Front 20

What does the downward sloping AD curve represent?

Back 20

An inverse relationship between the price level and the quantity demanded of Real GDP.

Front 21

What will shift the AD curve to the left? Right?

Back 21

-Decrease in consumption, investments and net exports.
-Increase in consumption, investments and net exports.

Front 22

What factors can change consumption?

Back 22

-Wealth: As wealth goes up, consumption goes up and AD goes up.
-Expectations of future prices and income: Expect higher future prices, consumption increases and AD increases. Expect higher future income, consumption goes up and AD goes up.
-Interest Rate: As the interest rate goes up, consumption goes down and AD goes down.
-Income Taxes: As income taxes go up, consumption goes down and AD goes down.

Front 23

What factors can change investment?

Back 23

-Interest Rate: As interest rate goes up, investment goes down and AD goes down.
-Expectations about future sales: If businesses become optimistic about future sales, investment goes up and AD goes up.
-Business Taxes: As business taxes increase, investment decreases and AD decreases.

Front 24

What factors can change net exports?

Back 24

-Foreign real national income: As the foreign real national income increases, U.S. exports increase therefore U.S. net exports increase and AD increases.
-The exchange rate: As the dollar depreciates, U.S. exports incease and U.S. imports decrease, therefore U.S. net exports increase and AD increases.

Front 25

How does a change in interest rates change aggregate demand?

Back 25

It can change both consumption and investment which therefore changes AD.

Front 26

Where are interest rates determined?

Back 26

In the loanable funds market. In this market, there's a downward-sloping demand curve for loanable funds and an upward-sloping supply curve of loanable funds.

Front 27

What does an increase/decrease in demand for loanable funds do?

Back 27

Raises/Lowers the interest rate.

Front 28

What does an increase/decrease in supply of loanable funds do?

Back 28

Lowers/Raises the interest rate.

Front 29

What does a change in the interest rates lead to in terms of demand?

Back 29

A change in the QUANTITY demanded for loanable funds.

Front 30

What does a change in the interest rates lead to in terms of supply?

Back 30

A change in the QUANTITY supplied of loanable funds.

Front 31

What does the upward sloping SRAS curve represent?

Back 31

A direct relationship between the price level and the quantity supplied of Real GDP.

Front 32

What factors shift the SRAS curve to the right?

Back 32

-Decrease in wage rates
-Decrease in the price of nonlabor inputs
-Increase in productivity
-Beneficial supply shocks

Front 33

What factors shift the SRAS curve to the left?

Back 33

-Increase in wage rates
-Increase in the price of nonlabor inputs
-Decrease in productivity
-Adverse supply shocks

Front 34

An increase in AD does what to price level and Real GDP?

Back 34

Increases the price level and increases Real GDP.

Front 35

A higher Real GDP is associated with?

Back 35

A lower unemployment rate.

Front 36

A lower Real GDP is associated with?

Back 36

A higher unemployment rate.

Front 37

What does the LRAS curve look like?

Back 37

It's a vertical line at the Natural Real GDP level.

Front 38

Natural GDP = ?

Back 38

Quantity demanded of Real GDP which is equal to the quantity supplied of Real GDP.

Front 39

What are the three states the economy can be in?

Back 39

-Short-run equilibrium
-Long-run equilibrium
-Disequilibrium

Front 40

What're four reasons that the SRAS curve is upward sloping?

Back 40

-Sticky wages
-Sticky prices
-Producer misperceptions
-Worker misperceptions

Front 41

Explain sticky wages!

Back 41

If wages are sticky, a decrease in the price level (which pushes real wages up) will result in a decrease in output. This is what an upward-sloping SRAS curve represents: as the price level falls, the quantity supplied of goods and services declines.

Front 42

Explain sticky prices!

Back 42

If some prices are sticky, a decline in the price level is linked with a decrease in output, which is illustrative of an upward-sloping SRAS curve.

Front 43

Explain producer misperceptions!

Back 43

If producers misperceive relative price changes, then a higher price level will bring about an increase in output, which is illustrative of an upward-sloping SRAS curve.

Front 44

Explain worker misperceptions!

Back 44

If workers misperceive real wage changes, then a fall in the price level will bring about a decline in output, which is illustrative of an upward-sloping SRAS curve.