ECN 204 Chapter Notes - Chapter 12: Full Employment, Economic Equilibrium, Deflation

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ECN – Chapter 12 – Aggregate Demand and Aggregate Supply

Aggregate demand – aggregate supply model (AD-AS model)

Aggregate demand – is a schedule or curve that shows the amount of a nations output (real

GDP) that buyers collectively desire to purchase at each possible price level

The down sloping aggregate demand curve AD indicates an inverse relationship between the

price level and the amount of real output purchased

A change in price level produces a real balances effect – a high price level reduces the real

value or purchasing power of the public’s accumulated savings balances

The aggregate demand curve also slopes downward because of the interest rate effect – when

the price level rises, consumers need more money for purchases and businesses need more

money to meet their payrolls and to buy other resources

The final reason why the aggregate demand curve slopes downward is the foreign purchases

effect – when the price level rises relative to foreign price levels, foreigners buy fewer goods

from our nation and we buy more foreign goods. Our exports fall and imports rise

Changes in aggregate demand involve:

A change in one of the determinants or aggregate demand that directly changes the

amount of real GDP demanded

A multiplier effect that produces a greater ultimate change in aggregate demand than

the initiating change in spending

Other factors than a change in price level may change consumer spending and therefore shift

the aggregate demand curve: real consumer wealth, consumer expectations, household debt

and taxes

Consumer wealth is the total dollar value of all assets owned by consumers in the

economy less the dollar value of their liabilities

Consumers can increase their consumption spending by borrowing (household

borrowing)

Changes in expectations about the future may alter consumer spending

A reduction in personal income tax rates raises take home income and increases

consumer purchases at each possible price level

Higher expected returns on investment projects will increase the demand for capital goods and

shift the aggregate demand curve to the right. Expected returns are influenced by several

factors

Expectations about future business conditions – most likely to forecast high rates of

return on current investment and may invest more today

Technology – enhance expected returns on investment and increase aggregate demand

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Related Questions

In the Keynesian model

aggregate demand determines real GDP per year.

the short-run aggregate supply curve determines real GDP.

unemployment cannot persist for long periods of time.

the aggregate demand curve determines the price level.

A terrible winter storm causes enormous problems in the

northeastern

part of the United States. This would cause

the short-run aggregate supply curve to shift to the left, but would have no effect on the long-run aggregate supply curve.

both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.

the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right.

both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts.

Equilibrium real GDP rises after the dollar strengthened. From this we can conclude that

the increase in aggregate demand was greater than the decrease in aggregate supply.

the decrease in aggregate demand was more than the increase in aggregate supply.

the decrease in aggregate demand was less than the increase in aggregate supply.

the increase in aggregate demand was less than the decrease in aggregate supply.

Saving is

the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.

the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.

the difference between disposable income and spending on goods and serviceswhile savings is the difference between real GDP and disposable income.

the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.

A permanent reduction in investment spending leads to

a proportional decrease in real GDP.

a more than proportional decrease in real GDP.

a more than proportional increase in real GDP.

a less than proportional decrease in real GDP.

An increase in net exports leads to an increase in real GDP. Further,

consumption spending increases while investment spending decreases.

consumption spending increases but saving does not change.

consumption spending and saving increase.

government spending decreases to offset the increase in net exports.

An increase in aggregate spending that is caused by a factor other than the price level will lead to the

aggregate demand curve shifting to the right.

aggregate supply curve shifting to the right.

aggregate supply curve shifting to the left.

aggregate demand curve shifting to the left.

The marginal propensity to consume is 0.9. The multiplier is

0.9.

1.11.

0.1.

10.

When the SRAS curve slopes upward, the actual affect of an increase in real autonomous spending on equilibrium real GDP is smaller than predicted by the multiplier because

real GDP increases.

the price level rises

the price level falls.

real GDP decreases.

Other things equal, the lower the total real value of final goods and services demanded in the economy the

more the production possibilities cure shifts to the left.

lower the price level.

higher the price level.

lower the level of endowments.

The long-run aggregate supply curve can be thought of as the

level of output for which real GDP equals nominal GDP.

level of output that the nation is currently producing.

level of real GDP associated with a constant price level.

full-employment level of real GDP.