All Flashcards
What are the differences between market demand and aggregate demand?
Market demand is for a single good/service; aggregate demand is for all goods/services in an economy.
What is the difference between a movement along the AD curve and a shift of the AD curve?
A movement along the curve is caused by a change in the price level; a shift of the curve is caused by changes in C, I, G, or NX.
Differentiate between the Real Wealth Effect and the Interest Rate Effect.
The Real Wealth Effect relates price levels to purchasing power and spending. The Interest Rate Effect relates price levels to interest rates, borrowing, and investment.
Compare and contrast fiscal policy and monetary policy.
Fiscal policy involves government spending and taxation to influence AD. Monetary policy involves central bank actions to control the money supply and interest rates to influence AD.
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current prices, while real GDP is adjusted for inflation.
Compare the effects of an increase in government spending and an increase in consumer confidence on the AD curve.
Both cause a rightward shift of the AD curve, but they originate from different components of GDP (G and C, respectively).
Differentiate between exports and net exports.
Exports are goods and services sold to other countries, while net exports are exports minus imports.
Compare and contrast the short-run and long-run effects of increased government spending on the economy.
In the short run, increased government spending shifts the AD curve to the right. In the long run, it may affect aggregate supply and potential output.
What is the difference between demand-pull inflation and cost-push inflation?
Demand-pull inflation is caused by increases in aggregate demand, while cost-push inflation is caused by decreases in aggregate supply.
Compare the effects of a tax cut targeted at low-income individuals versus a tax cut targeted at high-income individuals on AD.
A tax cut for low-income individuals is likely to have a larger impact on AD because they have a higher marginal propensity to consume.
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.
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.