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ECON 040 Lecture Notes - Lecture 5: Price Level, Output Gap, Aggregate Supply

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blackpig616
29 May 2020
School
College of The Sequoias
Department
Economics (ECON)
Course
ECON 040
Professor
Tootle

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Document Summary

Know if aggregate demand (ad) curve is upward or downward sloping and why; Know what is wealth effect (affecting the slope of ad); Know what is interest rate effect (affecting the slope of ad); Know what creates movement along the ad curve; Know what shifts the ad curve (change in government purchases, money supply, etc) and which direction; Know how aggregate supply curve looks in the short run (sras) Know what are the sticky wages and how they affect sras slope; Know what shifts sras curve and which direction; Know how aggregate supply curve looks in the long run (lras) Know what shifts lras curve and which direction; Know what is the effect of a demand shock (increase or decrease in ad) on aggregate price level and output (real gdp) in the short run; Know what is the effect of a supply shock (increase or decrease in as) on aggregate price level and output (real gdp) in the short run;

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Related Questions

Determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or the left?). Also determine the effect on the price level, the real output level, and employment/unemployment. Explain and express this graphically using the AS/AD macro model.



In the summer of 1953, the Korean War ended and government expenditures decreased. In terms of the AS-AD model, this change should have shifted the AD curve to the left. A cut in government spending reduces economic activity and shifts the AD curve to the left.

1. Explain how the real balance effect works?

2. How will either the AD curve or SRAS curve shift as a result of each of the following changes:

A rise in the interest rate

An adverse supply shock

A rise in wealth

3. Explain what happens to U.S. net exports and U.S. aggregate demand as the dollar depreciates

4. Explain what happens to aggregate demand in each of the following cases: (a) The interest rate rises; (b) Wealth falls; (c) The dollar depreciates relative to foreign currencies; (d) Households expect lower prices in the future; (e) Business taxes rise.

5. Explain how expectations about future sales will affect investment.

6. Explain how each of the following can affect short-run aggregate supply: (a) An increase in wage rates; (b) A beneficial supply shock; (c) An increase in the productivity of labor; (d) A decrease in the price of a nonlabor resource (such as oil).

(a) An increase in SRAS that is greater than the increase in AD will lead to an increase in Real GDP and a fall in the price level.

(b) A decrease in AD that is greater than the increase in SRAS will lead to a fall in both the Real GDP and the price level.

(c) An increase in SRAS that is less than the increase in AD will lead to an increase in both the

Determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or the left?). Also determine the effect on the price level, the real output level, and employment/unemployment. Explain and express this graphically using the AS/AD macro model.

A fall in the value of the dollar makes U.S. goods cheaper to foreigners and foreign goods more expensive to U.S. citizens. This shifts the U.S. aggregate demand curve to the right.