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Questions and Answers
What does the aggregate demand curve show?
What does the aggregate demand curve show?
What is the wealth effect of a change in aggregate price level?
What is the wealth effect of a change in aggregate price level?
The effect on consumer spending caused by the change in purchasing power of consumers' assets.
What does the interest rate effect of a change in aggregate price level refer to?
What does the interest rate effect of a change in aggregate price level refer to?
The effect on consumer spending and investment spending caused by a change in purchasing power of money holdings.
What does the aggregate supply curve illustrate?
What does the aggregate supply curve illustrate?
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What is a nominal wage?
What is a nominal wage?
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What are sticky wages?
What are sticky wages?
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What does the short-run aggregate supply curve represent?
What does the short-run aggregate supply curve represent?
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What does the long-run aggregate supply curve indicate?
What does the long-run aggregate supply curve indicate?
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What is potential output?
What is potential output?
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What does the AD-AS model analyze?
What does the AD-AS model analyze?
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When is the economy in short-run macroeconomic equilibrium?
When is the economy in short-run macroeconomic equilibrium?
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What is the short-run equilibrium aggregate price level?
What is the short-run equilibrium aggregate price level?
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What is short-run equilibrium aggregate output?
What is short-run equilibrium aggregate output?
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What is a demand shock?
What is a demand shock?
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What is a supply shock?
What is a supply shock?
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What is stagflation?
What is stagflation?
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When is the economy in long-run macroeconomic equilibrium?
When is the economy in long-run macroeconomic equilibrium?
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What defines a recessionary gap?
What defines a recessionary gap?
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What describes an inflationary gap?
What describes an inflationary gap?
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What is the output gap?
What is the output gap?
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What does it mean when the economy is self-correcting?
What does it mean when the economy is self-correcting?
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What is stabilization policy?
What is stabilization policy?
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Study Notes
Aggregate Demand and Supply
- The aggregate demand curve depicts the inverse relationship between the aggregate price level and the total output demanded by various sectors including households, businesses, government, and foreign entities.
- The aggregate supply curve illustrates the relationship between the aggregate price level and the total output supplied in the economy.
Economic Impact of Price Level Changes
- The wealth effect indicates how changes in the aggregate price level affect consumer purchasing power and subsequently influence consumer spending.
- The interest rate effect describes how fluctuations in the aggregate price level impact consumer and business spending by altering the purchasing power of money holdings.
Wage Dynamics
- Nominal wage refers to the dollar amount paid to workers for their labor.
- Sticky wages are wages that do not quickly adjust to economic conditions, remaining stable even in situations of high unemployment or labor shortages.
Aggregate Supply Framework
- The short-run aggregate supply curve represents the amount of output supplied in the short run, where many costs are considered fixed.
- The long-run aggregate supply curve shows the output supplied when all prices, including wages, are flexible—indicative of the economy's potential output.
Economic Equilibrium
- Potential output reflects the real GDP level if all prices were flexible, representing the economy's ideal output capacity.
- Short-run macroeconomic equilibrium occurs when the quantity of output supplied matches the quantity demanded.
- The short-run equilibrium aggregate price level and short-run equilibrium aggregate output represent the price level and output produced when the economy is in short-run equilibrium.
Economic Fluctuations
- A demand shock is an event that leads to a shift in the aggregate demand curve.
- A supply shock results in a shift in the short-run aggregate supply curve.
- Stagflation refers to the simultaneous occurrence of inflation and declining output.
Long-Term Economic Stability
- Long-run macroeconomic equilibrium occurs when the economy's short-run equilibrium aligns with the long-run aggregate supply curve.
- An inflationary gap describes a scenario where actual output exceeds potential output, while a recessionary gap occurs when actual output is below potential output.
- The output gap measures the percentage difference between actual output and potential output.
Automatic Market Corrections
- The economy is deemed self-correcting when short-term shocks to aggregate demand affect output temporarily, but long-term output adjusts back to potential levels.
- Stabilization policy involves government interventions to mitigate severe recessions and temper excessively rapid expansions.
Studying That Suits You
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Description
Test your knowledge on key concepts from Economics Chapter 12 with these flashcards. This set includes definitions and explanations of important terms such as the aggregate demand curve and the wealth effect. Perfect for reinforcing your understanding of consumer behavior and economic principles.
