ch11 (week 2) – Flashcards

Definition Aggregate supply is the relationship between real GDP and the price level for output, holding the price of inputs fixed

A rise in input prices

An epidemic that kills several workers

Definition Aggregate demand is the total spending in an economy on domestic goods and services for each price level

Equilibrium condition When aggregate demand equals aggregate supply

The slope of the aggregate supply curve increases with an increase in the price level

Aggregate supply slopes upward, because as the price level rises, with the price of inputs remaining fixed, firms have an incentive to produce more and to earn higher profit

Importance Say's law, which suggests that supply creates its own demand does seem a good approximation for the long run.

The economy enjoys a stable price level

Because a rise in the price level reduces people's wealth, consumption spending will fall as the price level rises

The intuition behind ______ is that the level of gross domestic product in an economy is not primarily determined by the potential of what the economy can supply, but rather by the amount of total demand.

A situation of high unemployment and inflation

Potential GDP is defined as the quantity that an economy can produce by fully employing its existing levels of labor, physical capital, and technology, in the context of its existing market and legal institutions. It is also called full-employment GDP.

increase in worker productivity

supple creates own demand

Interest rates in an economy fall as the price level rises, reducing investment spending

The economy enjoys a low unemployment rate

The economy enjoys a low unemployment rate

It cannot explain periods of recession and high unemployment.

a cut in tax rates

A decrease in government spending

The economy enjoys a stable price level

Because a rise in the price level reduces people's wealth, consumption spending will fall as the price level rises