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44 Cards in this Set

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Aggregate Demand
The quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus
Aggregate Demand Curve
A curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus.
What are the three reasons that the AD curve is downward sloping?
The Real Balance Effect, The Interest Rate Effect, and The International Trade Effect.
The Real Balance Effect
The change in the purchasing power of dollar-denominated assets that results from a change in the price level.
Monetary Wealth
The value of a person's monetary assets.
Purchasing Power
The quantity of goods and services that can be purchased with a unit of money. Purchasing power and the price level are inversly related.
Interest Rate Effect
The changes in household and business buying as the interest rate changes.
International Trade Effect
The change in foreign sector spending as the price level changes.
Wealth
The value of all assets owned, both monetary and nonmonetary.
Exchange Rate
The price of one currency in terms of another currency.
Appreciation
An increase in the value of one currency relative to other currencies.
Depreciation
A decrease in the value of one currency relative to other currencies.
Aggregate Supply
The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus.
Short-Run Aggregate Supply (SRAS) Curve
A curve that shows the quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus.
Menu Costs
The costs of changing prices.
Short-Run Equilibrium
-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.
Natural Real GDP
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.
Long-Run Aggregate Supply (LRAS) Curve
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.
Long-Run Equilibrium
-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.
What does the downward sloping AD curve represent?
An inverse relationship between the price level and the quantity demanded of Real GDP.
What will shift the AD curve to the left? Right?
-Decrease in consumption, investments and net exports.
-Increase in consumption, investments and net exports.
What factors can change consumption?
-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.
What factors can change investment?
-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.
What factors can change net exports?
-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.
How does a change in interest rates change aggregate demand?
It can change both consumption and investment which therefore changes AD.
Where are interest rates determined?
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.
What does an increase/decrease in demand for loanable funds do?
Raises/Lowers the interest rate.
What does an increase/decrease in supply of loanable funds do?
Lowers/Raises the interest rate.
What does a change in the interest rates lead to in terms of demand?
A change in the QUANTITY demanded for loanable funds.
What does a change in the interest rates lead to in terms of supply?
A change in the QUANTITY supplied of loanable funds.
What does the upward sloping SRAS curve represent?
A direct relationship between the price level and the quantity supplied of Real GDP.
What factors shift the SRAS curve to the right?
-Decrease in wage rates
-Decrease in the price of nonlabor inputs
-Increase in productivity
-Beneficial supply shocks
What factors shift the SRAS curve to the left?
-Increase in wage rates
-Increase in the price of nonlabor inputs
-Decrease in productivity
-Adverse supply shocks
An increase in AD does what to price level and Real GDP?
Increases the price level and increases Real GDP.
A higher Real GDP is associated with?
A lower unemployment rate.
A lower Real GDP is associated with?
A higher unemployment rate.
What does the LRAS curve look like?
It's a vertical line at the Natural Real GDP level.
Natural GDP = ?
Quantity demanded of Real GDP which is equal to the quantity supplied of Real GDP.
What are the three states the economy can be in?
-Short-run equilibrium
-Long-run equilibrium
-Disequilibrium
What're four reasons that the SRAS curve is upward sloping?
-Sticky wages
-Sticky prices
-Producer misperceptions
-Worker misperceptions
Explain sticky wages!
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.
Explain sticky prices!
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.
Explain producer misperceptions!
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.
Explain worker misperceptions!
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.