Swalaheen Aggregate Expenditure/ Aggregate Supply and Demand
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| Aggregate Expenditure Model | show 🗑
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| show | Consumption (C), Planned Investment (I), Government Purchases (G), Net Exports (NX)
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| Inventories | show 🗑
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| Macroeconomic Equilibrium | show 🗑
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| show | Inventories are unchanged, the economy is in macroeconomic equilibrium.
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| When, AE < GDP | show 🗑
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| When, AE > GDP | show 🗑
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| show | 1)Current disposable income, 2)household wealth, 3)expected future income, 4)the price level, and 5)the interest rate.
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| show | Most important Variable of Consumption.
*We would expect consumption to increase when the current disposable income of households increase and to decrease when the current disposable income of households decrease.
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| Consumption Function | show 🗑
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| Autonomous Expenditure | show 🗑
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| Multiplier | show 🗑
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| Multiplier Effect | show 🗑
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| Aggregate Demand Curve (AD) | show 🗑
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| show | To fall.
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| show | TRUE
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| show | FALSE. The rise in US price levels causes US exports to become MORE expensive, and foreign imports will become relatively LESS expensive, causing net exports to FALL.
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| show | A model the explains short-run fluctuations in real GDP and the price level.
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| show | TRUE.
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| show | A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
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| Short-Run Aggregate Supply (SRAS) Curve | show 🗑
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| show | Because a fall in the rpice level increases the quantity of real GDP demanded.
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| The Wealth Effect | show 🗑
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| The Interest Rate Effect | show 🗑
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| show | A lower price level in the US relative to other countries causes net exports to rise, increasing the quantity of goods and services demanded. A higher price level has a reverse effect.
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| show | TRUE.
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| show | 1) Changes in government policies.
2) Changes in the expectations of households and firms.
3) Changes in foreign variables.
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| Monetary Policy | show 🗑
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| T/F: By lowering interest rates, the Fed can lower the cost to firms and households of borrowing. Lowering borrowing costs increases consumption and investment which shifts the AD curve to the LEFT. | show 🗑
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| show | Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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| show | FALSE. It shifts to the right.
*A decrease in government purchases shifts the aggregate demand curve to the LEFT.
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| T/F: Higher personal income taxes REDUCE consumption spending and shift the aggregate demand curve to the LEFT. | show 🗑
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| T/F: Increase in business taxes REDUCE the profitability of investment spending and shift the AD curve to the LEFT. | show 🗑
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| show | FALSE. It will shift to the right.
*If a household or firm is more optimistic about the future incomes, they are likely to increase their current consumption.
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| show | TRUE.
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| show | FALSE. It will result in a MOVEMENT along the the aggregate demand curve, NOT a shift.
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| An Increase in interest rates will cause the aggregate demand curve to... | show 🗑
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| An increase in government purchases causes the AD curve to... | show 🗑
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| show | Shift to the left.
*Consumption spending falls when personal taxes rise, and investment falls when business taxes rise.
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| An increase in households expectations of their future incomes causes the AD curve to... | show 🗑
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| show | Shift to the right.
*Investment spending would increase.
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| The growth rate of domestic GDP relative to the growth rate of foreign GDP cause the AD curve to... | show 🗑
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| An increase in the exchange rate (the value of the dollar) relative to foreign currencies will cause the AD curve to... | show 🗑
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| show | TRUE.
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| show | Level of GDP in the long run.
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| In the long run, the level of GDP is determined by: | show 🗑
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| show | A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.
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| Why is the SRAS curve upward sloping? | show 🗑
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| What does it mean when prices or wages are said to be "Sticky"? | show 🗑
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| Menu Costs | show 🗑
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| There is a movement along the AS curve when... | show 🗑
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| Variables that shift the SRAS curve. | show 🗑
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| show | FALSE. It will shift to the LEFT.
It will shift RIGHT when they are adjusting to a LOWER price level.
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| show | An unexpected event that causes the SRAS curve to shift.
*Often caused by unexpected increases or decreases in the prices of important natural resources that can case firms' cost to be different from what they expected.
ex) Oil Prices
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| T/F: Because of inflation workers and firms always expect next year's price level to be higher than this year's. | show 🗑
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| An increase in the labor force or capital stock causes the SRAS curve to... | show 🗑
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| An increase in productivity causes the SRAS curve to... | show 🗑
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| An increase in the expected future price level causes the SRAS curve to... | show 🗑
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| show | Shift to the left.
*Workers and firms increase wages and prices.
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| show | Shift to the left.
*Costs of producing output rise.
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| T/F: In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. | show 🗑
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| show | FALSE. In the short run, a DECREASE in AD results in a recession, and causes only a DECREASE in price level in the long run.
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| T/F: Economists refer to the process of adjustment back to potential GDP as an AUTOMATIC MECHANISM because it occurs without any actions by the government. | show 🗑
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| show | A combination of inflation and recession, usually resulting from a supply shock.
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| What is the usual cause of inflation? | show 🗑
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