Chapter 10: Aggregate Demand and Aggregate Supply

  1. What is the relationship between price level and GDP demand?
    The relationship between price level and GDP demand is inverse/negative

    • - Price level rises
    • - Quantity of GDP demanded decreases

    • - Price level falls
    • - Quantity of GDP demanded increases
  2. What is the Real Balances Effect?
    Inverse relationship between price level and real value (purchasing power)

    A higher price level reduces the purchasing power of the public's savings; the value of assets diminishes

    Higher price level = less consumption spending
  3. What is the Interest Rate Effect?
    Direct relationship between price level and demand for money

    A higher price level increases the demand for money
  4. What is the Foreign Trade Effect?
    Canadian price level rises ---> Foreigners buy fewer Canadian goods ---> Canadians buy more foreign goods ---> Canadian exports fall & Canadian imports rise
  5. Changes in Aggregate Demand:
    What happens with an increase in Aggregate Demand?
    What happens with a decrease in Aggregate Demand?
    • Increase in Aggregate Demand:
    • Amount of goods and services demanded is higher

    • Decrease in Aggregate Demand:
    • Amount of goods and services demanded is lower
  6. What defines a Short Run Aggregate Supply?
    What does the curve look like?
    Prices are fixed but output can vary

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  7. What defines the Long Run Aggregate supply?
    What does the curve look like?
    Both input and output prices can vary

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  8. What is the Inflationary Gap?

    What is the Recessionary Gap?
    Inflationary Gap:

    The amount by which equilibrium GDP exceeds potential GDP

    Recessionary Gap:

    The amount by which equilibrium GDP falls short of potential GDP
  9. Increase in Aggregate Demand
    What does it cause?
    Explain the shifts.
    • Increase in Aggregate Demand causes INFLATION
    • and POSITIVE GDP GAPS (actual GDP exceeds potential GDP)

    - Increase in Aggregate Demand increases both GDP and Price Level

    • - Increase in Aggregate Demand from AD1 to AD 2
    • - Inflation from P1 to P2
    • - Output increases from GDP f to GDP 1
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  10. Decrease in Aggregate Demand
    What does it cause?
    Explain the shifts.
    - Causes Recession, Negative GDP Gaps and Cyclical Unemployment

    If Price level is Downwardly Inflexible:

    • - Decline of aggregate demand from AD 1 to AD 2 moves economy from a to b, and
    • - reduces GDP from GDPf to GDP1

    If price level is Flexible Downward,

    - Decline in Aggregate Demand moves economy from a to c (instead of a to b)

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  11. Decrease in Aggregate Supply
    What does it cause?
    Explain the shifts.
    Causes COST-PUSH Inflation

    • - Aggregate supply shifts from AS1 to AS2
    • - Economy moves from A to B
    • - Price Level rises from P1 to P2
    • - Real output declindes from GDPf to GDP2
    • Image Upload 10
  12. Increase in Aggregate Supply
    What does it cause?
    Explain the shifts.
    • Causes - full employment
    • - economic growth
    • - price stability
Author
Spe
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145063
Card Set
Chapter 10: Aggregate Demand and Aggregate Supply
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Chapter 10: Aggregate Demand and Aggregate Supply
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