Macroeconomics chapter 13: aggregate supply and demand – Flashcards
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Aggregate demand curve shows:
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Relationship between price level and level of planned aggregate expenditures of households, firms and the government (real GDP)
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Four components of aggregate demand:
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Consumption (C) Investment (I) Net exports (NX)
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Describe the slope of the aggregate demand curve
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Downward sloping
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Explain what components make the aggregate demand slope take it's direction
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It's downward sloping because: A decline in price level causes consumption, investment, and net exports to increase
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What causes the aggregate demand curve to shift?
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Changes in government policy, changes in the expectations of households and firms, and changes in foreign variables
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The long run aggregate supply curve shows:
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The relationship in the long run between the price level and the quantity of real GDP supplied
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Describe the slope of the long run aggregate supply curve:
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Vertical
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Why is the long run aggregate supply curve vertical?
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In the long run, real GDP is always at potential and is unaffected by price level (on y-axis)
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Why is the aggregate supply curve upward sloping? (4 reasons)
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The future price level is unpredictable, therefore the slope is always upward Contracts make wages and prices "sticky" Businesses adjust wages slowly Menu cost make some prices "sticky"
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What are menu costs?
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Costs to firms of changing prices on menus or catalogs
