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Questions and Answers
What does the aggregate demand curve show?
What does the aggregate demand curve show?
the relationship between the aggregate price level and the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world.
Why does the aggregate demand curve slope downward?
Why does the aggregate demand curve slope downward?
because as the price level falls, the ability of households and firms to borrow cheaply increases.
What happens if the economy is at Y1 and the price level decreases?
What happens if the economy is at Y1 and the price level decreases?
a downward movement along the AD1 curve will take place, reflecting a decrease in the price level.
What happens to the aggregate demand curve if consumer assets and wealth lose value while prices remain constant?
What happens to the aggregate demand curve if consumer assets and wealth lose value while prices remain constant?
When will aggregate demand shift to the right?
When will aggregate demand shift to the right?
What could cause a movement from point A on AD1 to point C on AD2?
What could cause a movement from point A on AD1 to point C on AD2?
What does the aggregate supply curve show?
What does the aggregate supply curve show?
What will firms in imperfectly competitive markets do when the price level decreases?
What will firms in imperfectly competitive markets do when the price level decreases?
What does the short-run aggregate supply curve illustrate?
What does the short-run aggregate supply curve illustrate?
A change in _____ would cause a shift in the short-run aggregate supply curve.
A change in _____ would cause a shift in the short-run aggregate supply curve.
When will the short-run aggregate supply curve shift to the left?
When will the short-run aggregate supply curve shift to the left?
What is potential output?
What is potential output?
Which of the following is TRUE with respect to short-run and long-run aggregate supply?
Which of the following is TRUE with respect to short-run and long-run aggregate supply?
What does a positive demand shock lead to?
What does a positive demand shock lead to?
An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.
An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.
In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.
In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.
What does the intersection of AD with SRAS in the Inflationary and Recessionary Gaps figure indicate?
What does the intersection of AD with SRAS in the Inflationary and Recessionary Gaps figure indicate?
In an inflationary gap in the short run, what happens in the long run?
In an inflationary gap in the short run, what happens in the long run?
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Study Notes
Aggregate Demand Curve
- Illustrates the relationship between the aggregate price level and the total output demanded by households, businesses, government, and foreign entities.
- Slopes downward as lower price levels increase borrowing capacity for households and firms.
- A decrease in price level results in a movement down the curve, indicating a rise in output demanded.
Factors Influencing Aggregate Demand
- Loss of consumer assets and wealth causes the aggregate demand curve to shift leftward.
- Government purchases increase aggregate demand, shifting the curve rightward.
- An increase in the total quantity of consumer goods and services demanded results in movement from one point on the demand curve to another.
Aggregate Supply Curve
- Shows the relationship between the aggregate price level and the total output supplied by firms.
- Decrease in price level leads firms in imperfectly competitive markets to reduce output and prices.
- The short-run aggregate supply curve reflects a direct correlation between aggregate price level and output supplied.
Shifts in Aggregate Supply
- Changes in commodity prices can result in shifts in the short-run aggregate supply curve.
- An increase in nominal wages leads to a leftward shift of the short-run aggregate supply curve.
- Potential output reflects the economy's output capability when all prices are flexible.
Short-run vs. Long-run Dynamics
- The economy can simultaneously exist on both short-run and long-run aggregate supply curves.
- A positive demand shock elevates both prices and employment levels.
- An increase in aggregate demand results in higher short-run real GDP and price levels.
Long-run Adjustments
- In the long run, as the economy corrects itself, aggregate demand increases typically leads to higher prices while potential output remains stable.
- The intersection of aggregate demand with short-run aggregate supply signifies a short-run equilibrium.
- If an economy is in an inflationary gap in the short run, it naturally self-corrects to restore GDP to its potential level over time.
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