Econ Final Exam Study Guide (real) - unemployment 6.7 in...

 Chapter 13: AD and AS
 AD
o AD: the level of real GDP purchased by households (C), businesses
(I), government (g), and foreigners (NX)
o Why does AD have a negative slope?
 Wealth effect
 Interest rate effect
 NX effect
 The Wealth effect:
o Wealth = assets – liabilities
o Assets: (WRE/P) and (WSM/P)
o As the price level rises: the real value of wealth falls  C falls
o CPI
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 True or false ****(TEST QUESTION)

o An oil price shock results in a shortage and therefore increase in AD.
o False (decreases AD)
 The US Economy in the LR and SR
o
 LRAS (long run Aggregate Supply)
o Identifies output at potential (full employment)
o Potential output is determined by the
 Number of workers
 Capital stock
 Available technology
o LRAS is vertical: changes in prices level do not affect the level of real
GDP in the LR
 What does this mean?
 If the price out inputs doubles AND the price of output
doubles, firms have no incentive to increase production
 Shifts in LRAS
o Recall shifts in PPF
o Change in resource base
 Change in number of workers
 Change in capital stock
o Technological change/innovation
o An Example :

 GDP deflator is on Y, RGDP is on X
 Technological change, (adoption of the internet)
 Full employment output increases to Ybar 2
o Each year potential output increases as the resource base increase and
technological changes occurs
 Shifts in AD
o AD = C + I + G + NX
o Change in AD is a change in any of those
o Change in C
 Due to a change in
 Wealth
 Expected future income or consumer confidence
 Real interest rates
 Taxes
o Change in I

 Due to a change in
 Real interest rates
 EFP
 Technological change
