Econ Chp. 33

Front 1

To analyze short run fluctuations in an economy use

Back 1

the model of aggregate demand and aggregate supply

Front 2

Business Cycle

Back 2

Fluctuations in the economy

economic fluctuations correspond to changes in business conditions, when real gdp grows rapidly, business is good.

Business cycle is not regular or consistent

Front 3

Three main facts about Economic fluctuations

Back 3

1. Irregular and unpredictable

2. Most macroeconomic quantities fluctuate together

3.As output falls unemployment rises

Front 4

When economic conditions deteriorate what is one of the main causes

Back 4

decrease in Investment (reduction on spending on new factories, houses, inventories)

Front 5

the short run model of economic fluctuations focuses on the behavior of two variables

Back 5

1. Read GDP

2. Average level of prices (measured by CPI or GDPD)

Front 6

Model of Aggregate Demand and aggregate supply

Back 6

The model that most economists use to explain short-run fluctuations in economic activity around its long-run trend--Pg. 745

Front 7

Aggregate Demand Curve-Pg. 746

Back 7

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Front 8

Aggregate Supply Curve

Back 8

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Front 9

Why Does the Aggregate Demand Curve slope downward?

Back 9

How the price level affects the C I and NX

1. A decrease in the price levels RAISES the real value of money making individuals richer which in turn encourages them to spend more. this increase in Consumer spending (C) means a larger quantity demanded.

2. A lower price level reduces the interest rate, encourages greater spending on Investment goods (I) and thereby increases teh quantity of goods and services demanded.

3. when a fall in the U.S. price level causes U.s. interest rates to drop the real value of the dollar declines in foreign exchange markets. This depreciaton stimulates U.S. net exports and thereby increases the quantity of goods and services demanded

Front 10

True or false,

a change in the supply of money shifts the aggregate demand curve?

Back 10

True!

Front 11

What would cause the Aggregate Demand Curve to shift?

Review page 752 T. 1

Back 11

1. Any event tht changes how much people want to consume at a given price level

2.Any event that changes how much firms want to invest at a given price level (optimism shifts right, pessimism shifts left)

3.Tax credit for investment purchases can shift it to the right, a repeal of tax credit will shift it to the left

4. Increase in money supply will shift it to the right, decrease in money supply will shift it left

5.Increase or decrease in Government spending will shift it right or left

6.Any event that changes net exports--(appreciation of the dollar makes U.S. goods more expensive compared to foreign goods so it would shift left)

Front 12

How does time horizon affect the aggregate supply curve?

Back 12

Long Run: Aggregate Supply Curve is vertical

Short Run: Agg. Supply curve is upward sloping

Front 13

What determines the quantity of goods and services supplied in the long run for an economy?

Back 13

an economy's produciton of goods and services (real GDP) depends on its supplies of labor, land, capital, and natural resources and on technology used to turn factors of production into goods and services

NOT the price level

Front 14

Why is the Agg. Supply Curve vertical in the long run?

Back 14

labor capital, natural resources, and technology determine the total quantity of goods and services supplied and this quantity supplied is THE SAME REGARDLESS OF THE PRICE LEVEL. Price level does not affect long determinants of real GDP

the vertical long run aggregate supply curve is a graphical representation of the classical dichotomy and monetary neutrality.

Front 15

What shifts the Long-Run Aggregate Supply Curve?

Back 15

<b>any change in the economy that alters the natural rate of output.</b>

The position of the long-run aggregate supply curve depends on the natural rate of unemployment (e.g. raising minimum wage laws)

1. Changes in labor Force or unemployment levels

2. Changes in the physical Capital stock or Human capital stock

3. Change in access to amount of Natural Resources (new discovery, change in weather, change in ability to import resources etc.)

4. changes in Technological knowledge "Technology" (literal technology improvement, new access to free trade, governement bans on certain kinds of processes (move left))

Front 16

any policy or event that raised real gdp in previous chapters can now be described as increasing the quantity of goods and services supplied and shifting the long run aggregate supply curve to the right. Any policy or event that lowered real gdp in previous chapters can no be described as decreasing the quantity of goods and services supplied and shifting the long run aggregate supply to the left

Back 16

true

Front 17

Although there are many forces that govern the economy in the long run and can in theory cause shits, what are the two most important in the real world?

Back 17

1. Technological change

2. Monetary policy

Front 18

In the short run the price levle does NOT affect the economy's output?

Back 18

FALSE!

In the short run price levels DO affect output, but in the long-run price levels do NOT affect output

Front 19

Sticky wage theory

Back 19

the short run aggregate supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions (they're sticky...)

Front 20

The misperceptions Theory

Back 20

changes in the overall price level can temporrily mislead suppliers about what is happening in the individual markets which they sell their output.

Front 21

Sticky price thoery

Back 21

prices of some goods and services adjust sluggishly in response to changing economic conditions

Front 22

All three theories about why the SR agg. supply curve slopes upward can be summed up by this mathematical equation

Back 22

Quanitity of output supplied = Natural rat of output + a(Actual price level - Expected price level)

a represents a number that determines how much output responds to unexpected changes in the price levle

Front 23

An increase in the expected price level reduces the quantity of goods and services supplied and shifts the SR agg. supply curve to the left. A decrease in the expected price level raises the quantity of goods and services supplied and shifts the SR agg. supply curve to the right

Back 23

true review pg 760

Front 24

review T2 pg 761

Back 24

yes

Front 25

Long Run Aggregate Equilibrium

Back 25

when the economy reaches this long run equilibrium the EXPECTED PRICE = THE ACTUAL PRICE as a result SR agg. supply curve crosses this point as well

see page 762 now!

Front 26

3 main points when Agg. Demand curve shifts

Back 26

In the short run, shifts of Agg. Demand cause fluctuations in the economy's output of goods and services

In the long run, shifts in aggregate demand affect the overall price level but do not affect output

Policymakers who influence aggregate demand can potentiall mititgate the severity of economic fluctuations

Front 27

stagflation

Back 27

a period of falling output and rising prices

Front 28

Wage-Price Spiral

Back 28

higher prices leading to higher wages that lead to even higher prices

Front 29

Shifts in aggregate supply can cause stagflation a combination of recession (falling output) and inflation (rising prices)

Policymakers who can influence aggregate demand can potentially mitigate the adverse impact on output but only at the cost of exacerbating the problem of inflation

Back 29

a combination of recession (falling output) and inflation (rising prices)