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ECON 103 Lecture Notes - Lecture 3: Aggregate Demand, Aggregate Supply, Stagflation

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School
University of Illinois
Department
Economics
Course
ECON 103
Professor
Mc Dermott Eric

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Document Summary

Model of aggregate demand and aggregate supply: the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend. Same with converse (increase in price level = decrease in quantity of goods & services demanded) Aggregate-supply curve: a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Recall gdp formula: (cid:1851)=+++(cid:1850) (y = yield, c = consumption, i = which is (cid:1857)(cid:1872) (cid:1857)(cid:1876)(cid:1868)(cid:1867)(cid:1870)(cid:1872)=(cid:1876)(cid:1868)(cid:1867)(cid:1870)(cid:1872) (cid:1865)(cid:1868)(cid:1867)(cid:1870)(cid:1872) Wealth effect: when price level falls, currency value rises in value and increases investments also including inventory, g = government spending, nx = net export, real wealth of consumers, allowing them to purchase more goods. Same with converse (increase in price level = decrease in currency value) Interest-rate effect: lower price level reduces interest rate, thus encouraging investment & increasing quantity of goods & services demanded.

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Related Questions

The aggregate demand curve slopes downward indicating that:
a. an increase in the general price level will increase the aggregate quantity of goods and services demanded.
b. consumers substitute between domestic-made and foreign-made goods as their relative prices change.
c. a change in the interest rate will alter the aggregate quantity of goods and services demanded.
d. an increase in the general price level will reduce the aggregate quantity of goods and services demanded.

A. A decrease in aggregate supply can result in:

  1. a recession
  2. cost-push inflation
  3. demand-pull inflation
  4. unemployment 

B. In the short run (intermediate-range) of the aggregate supply curve, higher aggregate demand will increase

  1. the price level but reduce real GDP.
  2. real GDP without raising the price level
  3. the price level without affecting real GDP
  4. both the price level and real GDP

C. Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

  1. As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services
  2. As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services
  3. As prices fall, the government will have to reduce taxes, which will lead to an increase in the number of goods and services purchased
  4. As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the number of goods and services purchased

A.

In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is:
a decrease in unemployment and a decrease in the aggregate price level.
a decrease in unemployment and an increase in the aggregate price level.
an increase in unemployment and an increase in the aggregate price level.
an increase in unemployment and a decrease in the aggregate price level.

B.

If the aggregate price level rises, holding everything constant, consumers will:
demand less aggregate output at all price levels resulting in a shift right of the AD curve.
find their purchasing power has increased and will purchase more goods and services leading to an increase in the aggregate output demanded.
need more money to purchase the same basket of goods which will lead to an increase in the demand for money leading to interest rate increases, and a reduction in the quantity of aggregate output demanded via a drop in investment demand.
need less money to purchase the same basket of goods which will lead to a decrease in the demand for money leading to interest rate decreases, and an increase in the quantity of aggregate output demanded via an increase in investment demand.