Macroeconomics Exam #2 Study Sheet

Macroeconomics Exam #2 Study Sheet - Aggregate Demand...

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Unformatted text preview: Aggregate Demand Shocks • Positive Aggregate Demand Shocks These are changes in variables that shift the AD curve to the right. Examples include increases in autonomous consumption, autonomous investment or nominal wealth. The intuition here is that given a price level an increase in autonomous consumption, autonomous investment, or nominal wealth will lead to an increase in expenditure which will lead to an increase in GDP. • Negative Aggregate Demand Shocks These are changes in variables that shift the AD curve to the left. Examples include decreases in autonomous consumption, autonomous investment or nominal wealth. The intuition here is that given a price level, a decrease in autonomous consumption autonomous investment or nominal wealth will lead to a decrease in expenditure which will lead to a decrease in GDP. • Key Ideas Principle: Aggregate demand shocks cause the price level and GDP to move in the same direction. Implications: Prediction of the effects of AD shocks Interpretation of real world events • Caveats Ongoing inflation and trend growth in output Need to modify principle Modified principle: Aggregate demand shocks cause inflation and the change in GDP over GDP to move in the same direction. • Effects of a Decline in Nominal Wealth Given a price level, autonomous consumption and autonomous investment, a decrease in nominal wealth leads to a decrease in real wealth which leads to a decrease in consumption and by extension a decrease in expenditures. Types of expenditure cuts include consumer durable goods, entertainment expenses and purchases of new houses. This is captured by a shift to the left of the AD curve. • Other Aggregate Demand Shocks State of consumer confidence Fiscal Policy Monetary policy International developments Exchange rate fluctuations Expansion or recession abroad Aggregate Supply Shocks • Aggregate supply shocks are changes in variables that determine the position of the AS curve. • Types of Aggregate Supply Shocks Adverse aggregate supply shocks are changes in variables that shift AS to the left. Examples include an increase in nominal wages, an increase energy prices, and an increase in technology prices or a decrease in capital stock. Favorable aggregate supply shocks are changes in variables that shift AS to the right. Examples include a decrease in nominal wages, energy prices or technology prices or an increase in capital stock. • Key Ideas Principle: aggregate supply shocks cause P and Y to move in opposite directions. Implications: Prediction of the effects of AS Shocks Interpretation of real world events • Caveats Ongoing inflation and trend growth in output Need to modify principle Modified principle: Aggregate supply shocks cause inflation and change in GDP over GDP to move in opposite directions....
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This note was uploaded on 02/10/2012 for the course ECON 101 taught by Professor Abc during the Fall '08 term at Johns Hopkins.

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Macroeconomics Exam #2 Study Sheet - Aggregate Demand...

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