prelim 2 study guide- ch 13-17,19

prelim 2 study guide- ch 13-17,19 - K RISTIN C HEN —E CON...

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Unformatted text preview: K RISTIN C HEN —E CON 102 P RELIM 2 S TUDY GUIDE : C H 13—17,19 CH 13—A GGREGATE D EMAND , A GGREGATE S UPPLY , & I NFLATION • AD Curve • Total demand for goods & services in the economy • NOT sum of market demand curves • At each point goods & money markets in equilibrium • Deriving the AD curve…- The Impact of an Increase in Price Level on the Economy, specifically Y—assuming no changes in G, T, & M s- ↑ P ⟹ M d ↑ ⟹ r ↑ ⟹ I ↓ ⟹ AE ↑ ⟹ Y ↓ • Shows negative relationship between Y & P • Shifts when policy variables (G, T, M s ) change • Reasons for a downward sloping AD curve:- Consumption link = decrease in consumption brought about by an increase in the interest rate contributes to the overall decrease in output- Real wealth effect or real balance effect = change in consumption brought about by a change in real wealth that results from a change in the price level • At all point along the AD curve, aggregate quantity of output demanded is exactly equal to planned aggregate expenditure- = + + Y C I G *equilibrium condition- K RISTIN C HEN —E CON 102 P RELIM 2 S TUDY GUIDE : C H 13—17,19- Factors that Shift the AD Curve- Expansionary monetary policy-- Ms ↑ ⟹ AD shifts to the right-- Contractionary monetary policy-- MS ↓ ⟹ AD curve shifts to the left- Expansionary fiscal policy-- G ↑ or T ↓ ⟹ AD curve shifts to the right-- Contractionary fiscal policy-- G ↓ or T ↑ ⟹ AD curve shifts to the left- • Short-Run AS Curve • aggregate supply = total supply of all goods & services in the economy • a graph that shows relationship betw. aggregate quantity of output supplied by all firms in an economy & the overall price level • NOT sum of market supply curves; NOT a market supply curve • At each point: set of firm’s price/ output decisions • As economy approaches max capacity, firms raise prices in response to further increases in demand • When the economy is operating at low levels of output, an increase in AD is likely to result in an increase in output w/ little or no increase in overall price level • Must be a lag betw. changes in input prices & changes in output prices otherwise SR-AS curve would be vertical • Shifts of the SR-AS Curve- Cost shock or supply shock = change in costs that shifts the SR-AS ----- K RISTIN C HEN —E CON 102 P RELIM 2 S TUDY GUIDE : C H 13—17,19---------- • Equilibrium price level = point at which AD & AS curves intersect • Determines SR equilibrium price level & aggregate output • Expansionary policy ( ↑ AD) works well when economy is on flat portion of AS curve ⟹ small ↑ P; big ↑ Y • Doesn’t work well on steep portion b/c ⟹ big ↑ P; small ↑ Y- • Long-Run Aggregate Supply Curve • Vertical; input costs fully adjust to changes in overall price level • Y = potential output or GDP = largest value of Y sustainable in LR without inflation • in LR, monetary & fiscal policy have no effect on Y • multiplier effect of...
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This note was uploaded on 01/26/2009 for the course ECON 102 taught by Professor Kyle during the Spring '08 term at Cornell University (Engineering School).

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prelim 2 study guide- ch 13-17,19 - K RISTIN C HEN —E CON...

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