Macroeconomics Exam 3

Front 1

Aggregate Demand Curve

Back 1

A curve that shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, government, and rest of the world.

It's a downward sloping, negative correlation between price level and quantity demanded.

Front 2

Why is the Aggregate Demand Curve downward sloping

Back 2

Two reasons:

1) Wealth effect: change in the AggPL. Higher AggPL reduces purchasing power of household's wealth and thus reducing consumer spending.

2) Interest rate effect: change in the AggPL. Higher interest rates make investment spending and consumer spending falls.

Front 3

Income expenditure equilibrium

Back 3

Occurs at the point where the curve AEPlanned, which shows real aggregate planned spending, crosses the 45-degree line. A fall in the aggregate price level causes the AEPlanned curve to shift from AEPlanned1 to AEPlanned2, leading to a rise in income-expenditure equilibrium GDP from Y1 to Y2.

Front 4

Shifts of Agg Demand Curve

Back 4

a) changes in expectations
b) ~ in wealth
c) Size of the existing stock of physical capital (if small, then increase)
d) Fiscal policy
e) Monetary policy

Front 5

Agg Suppy Curve

Back 5

the relationship between the aggregate price level and the quantity of aggregate output in the economy.

Upward sloping in the short run because nominal wages are sticky. Higher AggPL leads to more profits so suppliers are willing to supply more

Front 6

Nominal Wage

Back 6

dollar amount of the wage paid

Front 7

Sticky wages

Back 7

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

Front 8

Shifts of Agg Supply Curve

Back 8

a) ~ in commodity prices
b) ~ in nominal wages
c) ~ in productivity

Front 9

LOng Run Agg Supply curve

Back 9

relationship between aggPL and RGDP if all prices, including nominal wages were fully flexible.

It is a vertical line and it shows potential output (Yp*)

Front 10

Negative/Positive Demand Shock

Back 10

a) negative: leftward shift of demand cruve. low AggPL and lower RGDP
b) positive: rightward shift of demand curve. high AggPL and high RGDP

Front 11

Negative/Positive Supply Shock

Back 11

a) negative: leftward shift. high PL, low RGDP

b) positive: rightward shift. high RGDP. low PL

Front 12

Recessionary Gap

Back 12

RGDP is below potential output.

In a self correcting economy, the eventual fall in nominal wags will increase RGDP, returning to the LRMacroEquil

Front 13

Inflationary gap

Back 13

RGDP is above potential output.

In a self correcting economy, the eventual increase in nominal wages will decrease RGDP, returning it back to LRMacroEq

Front 14

Output gap

Back 14

[actual agg output - potential output] / [potential output] = x100

Front 15

policy dilemma (negative supply shock)

Back 15

A policy to stabilize RGDP by increasing AggDemand will lead to inflation.
A policy to stabilize inflation will even further decrease output slump

Front 16

Stabilization policy

Back 16

use of government policy to reduce the severity of recession and rein in excessively strong expansions

Front 17

Stagflation

Back 17

Inflation with falling RGDP. caused by negative supply shock