All Flashcards
What is Aggregate Demand (AD)?
Total demand for all goods and services in an economy at various price levels.
What is the Real Wealth Effect?
Higher prices reduce purchasing power, leading to decreased spending; lower prices increase purchasing power, leading to increased spending.
What is the Interest Rate Effect?
Higher prices lead to higher interest rates, discouraging borrowing and investment; lower prices lead to lower interest rates, encouraging borrowing and investment.
What is the Foreign Trade Effect?
Higher domestic prices make exports more expensive, reducing foreign demand; lower domestic prices make exports cheaper, increasing foreign demand.
Define Consumer Spending (C).
Household spending on goods and services.
Define Investment Spending (I).
Spending by firms on capital goods, inventories, and structures.
Define Government Spending (G).
Spending by the government on goods and services.
Define Net Exports (NX).
Exports minus imports.
What is Real GDP?
The total value of all goods and services produced in an economy, adjusted for inflation.
What is Price Level?
The average of all prices in the economy.
What does a rightward shift of the AD curve indicate?
An increase in Aggregate Demand at every price level.
What does a leftward shift of the AD curve indicate?
A decrease in Aggregate Demand at every price level.
On an AD/AS graph, what do the axes represent?
Vertical axis: Price Level; Horizontal axis: Real GDP.
How is equilibrium determined on an AD/AS graph?
At the intersection of the Aggregate Demand (AD) and Aggregate Supply (AS) curves.
If government spending increases, show the effect on the AD curve.
The AD curve shifts to the right.
If consumer confidence decreases, show the effect on the AD curve.
The AD curve shifts to the left.
What does a movement along the AD curve represent?
A change in the quantity of Real GDP demanded due to a change in the price level.
How does an increase in net exports appear on an AD/AS graph?
The AD curve shifts to the right.
How does a decrease in investment spending appear on an AD/AS graph?
The AD curve shifts to the left.
How would you graphically represent the effect of increased consumer wealth on the AD curve?
Shift the AD curve to the right.
How does increased consumer confidence affect Aggregate Demand?
Increased consumer confidence leads to increased consumer spending, shifting the AD curve to the right.
How does a decrease in government spending affect Aggregate Demand?
A decrease in government spending leads to a decrease in Aggregate Demand, shifting the AD curve to the left.
How do increased interest rates affect Aggregate Demand?
Increased interest rates discourage borrowing and investment, decreasing Aggregate Demand and shifting the AD curve to the left.
How does an increase in exports affect Aggregate Demand?
An increase in exports increases net exports, which increases Aggregate Demand, shifting the AD curve to the right.
How does a decrease in imports affect Aggregate Demand?
A decrease in imports increases net exports, which increases Aggregate Demand, shifting the AD curve to the right.
How does an increase in the price level affect the quantity of Aggregate Demand?
An increase in the price level causes a movement along the AD curve, decreasing the quantity of Real GDP demanded due to the real wealth, interest rate, and foreign trade effects.
How does a decrease in the price level affect the quantity of Aggregate Demand?
A decrease in the price level causes a movement along the AD curve, increasing the quantity of Real GDP demanded due to the real wealth, interest rate, and foreign trade effects.
How does increased inflation in a foreign country affect a domestic country's Aggregate Demand?
Increased inflation in a foreign country makes domestic goods relatively cheaper, increasing exports and Aggregate Demand in the domestic country.
How does a recession in a foreign country affect a domestic country's Aggregate Demand?
A recession in a foreign country decreases demand for domestic exports, decreasing Aggregate Demand in the domestic country.
If firms expect future economic growth, how will this affect Aggregate Demand?
Firms are likely to increase investment spending, increasing Aggregate Demand.