Transcript Chapter 10 Aggregate Demand & Aggregate Supply

1. What are the views of each on government intervention?
2. Does the economy self-correct, with no government
intervention?
3. What do the Monetarists believe and why are they called
Monetarists when they don’t believe in Monetary policy?
4. Who were some of the Classical
economists?
5. What is the unique story of Jeremy Bentham?
6. Do the Classicals or Keynesians have a just “Do Nothing”
strategy on fiscal and monetary policy?
7. What are the disagreements on flexible prices & wages?
8.
KFC Quiz
If a Keynesian statement, put “K”
If a Classical statement, put “C”, &
If you don’t know, put “KFC”
1776-1930s
1930s-1970s
Classicals–1776 – 1930s
No G intervention in economy
-20%
Founder: Adam Smith
Bible: Wealth of Nations
$10
$8
Macro Policy: “Do Nothing”
Motto: “Supply creates demand”
“The economy will self-correct in LR.”
LRAS
AD1
SRAS1
AD2
SRAS2
Smith
YR YR Y* YI
Keynesians – 1930-1970s; 1992-2000
G intervention in the economy (Fiscal Pol: G&T)
Founder: John Maynard Keynes
Bible: The General Theory
Macro Stabilization Policy: G&T & watch M work
Motto: “Demand Creates Supply.”
Keynes
“Ultimately, in the long run we are all dead.”
AE = C + Ig +
G + Xn
1776
Adam Smith
1723-1790
Classical v. Keynesian
1936
John Maynard Keynes
1883-1946 [died 4-21-46]
Price Level
AD1 AS
PL1
Adam Smith
YF
RDO
[“Cheaper Excess Supply Creates Its Own Demand”]
With lower PL, the real-balance, AD2 AD1
interest rate, & foreign purchase
effects kick in and the surplus
disappears and FE is regained.
PL1
AS
Surplus
PL2
The government doesn’t
need to do anything, or
“Nobody touch nothing.”
YF
RGDP
“Don’t worry, be happy. Everything
will work itself out in the long run.”
Markets in Classical Theory
The next four slides will demonstrate how flexible interest
rates, flexible product prices, and flexible wages will cause
the economy to equilibrate from recession back to FE.
(a) Loanable Funds market (dollars)
Real Interest Rate, (percent)
Markets in Classical Theory
DBorrowers
R=8%
S1
S2
Lenders
Increase in savings
R=5%
F1
“More investment;
more jobs”
F2
All right, I get
to keep my job.
Quantity of LF
Classical View
In Other words,
a “leakage” becomes…
An injection.
Markets in Classical Theory
(b) Product Market [Fish]
D1
D2
Consumers
-20%
S
Producers
“flexible
prices”
Decrease in demand for fish
QD1
“Lower prices;
more consumption”
QD2
Markets in Classical Theory
Resource Market [Labor]
Recession causes a decrease
in demand for workers, so there
is a surplus of workers.
D2
$10
$8
D1 Employers S1
Workers
S2
“flexible
wages”
Prices have dropped 20% so
workers will accept $8
because they have the same
purchasing power and they
still have a job.
Hire more workers
YR
“Lower Wages;
hire more”
Y*
Markets in Classical Theory
(d) Self regulating economy
LRAS
PL
AD1
AD2
“Flexible
-20%
prices”
SRAS2
Keynes argued the classical
model might explain the
$10
“Flexible
SRAS1
economy’s operation in the long
run but it might take years.
wages”
$8
YR YR Y*
RGDP
Now, with flexible interest rates, flexible product prices,
& flexible wages, let’s see how the economy self-corrects
after a recession. [Nothing “sticky” here]
Markets in Classical Theory
And that is the way Classicals viewed the economy.
SRAS2
LRAS
SRAS1
AD2
Price Level
PL3[108]
AD
E3
PL2[106]
PL1[103]
E2
E1
Inflation
Gap
0
Y1 Y2
Real domestic output
Friedman
Monetarists – 1960 – present
No G intervention in the economy.
Founder: Milton Friedman
Bible: Wealth of Nations
Macro Stabilization Policy:
Monetary Rule
Motto:
“Increase the MS 3-5% year”
MXV=PXQ
Quantity theory of Money
Equation of Exchange
The G prevents downward wage flexibility with the minimum wage,
pro-union legislation, pro-business monopoly legislation, and
subsidies to farmers. Their macro stabilization policy is:
“Don’t do something.
Just Sit there.”
Monetary Rule
Motto:
“Increase the MS 3-5% year”
MXV=PXQ
Friedman
Quantity theory of Money
Equation of Exchange
Unemployment: the result of a
short-lived adjustment period.
Prices and wages decrease
to restore full employment.
Adam Smith
[1723-1790]
Even if prices fall, wages may
not fall so the government
will have to create AD.
Keynesian Theory
Unemployment: the result of
long-term inadequate AD.
Inflexible [sticky] prices & wages
result in persistent unemployment.
John M. Keynes
(1883-1946)
The General Theory of Employment,
Interest, and Money
John Maynard Keynes (1936)
Keynes argues that no self-correcting
mechanism exists for restoring fullKeynes employment. If there is, then where is
it in this “Great Depression”?
So – the Classical School was Keynes’ “whipping boy”.
Take that, Classicals!!!
The “Great Depression” cried out for a solution and
this began the “rallying cry” for the beginning of
massive government intervention.
Full-
employment
assumptions
I shall argue that the postulates
of the classical theory are
recession
applicable to a special case only
and not to the general case . . .
prolonged with the result that its teaching is
recession
misleading and disastrous if we
attempt to apply it to the facts of
The Great Depression
experience.
(1936)
Keynesian Theory
Assumptions:
• Businesses may resist lower prices.
• Unions & workers may resist lower wages.
Suppose there is a recession . . .
Keynes:
The economy is driven by AD.
P1
B
A
AS
GDP 1929 - 1933
(billions of dollars)
1929
$103.1 bil.
1930
90.4 bil.
1931
75.8 bil.
1932
68.0 bil.
1933
56.0 bil.
Y2
YF 1
AD2
AD1
Government will have to ride to the rescue.
1929 to 1934
Consumption
20%
Investment
87%
Exports
67%
Real GDP
30%
Recall: AD = C + Ig+ G + (X-M)
Only
thing
left
A
B
AS
AD2
Y2
YF1
AD1
Recall: AD = C + I + G + (X-M)
PL
Keynes:
B
Y2
A
AS
AD2
YYF3F1
Use government spending to
stimulate AD to increase GDP.
AD13
Also, invented
S & D method for
analyzing markets.
Differentiated
between shifts of
D and S curves
and movements
along D and S
curves. [D/QD
and S/QS] By
doing so, he
cleared up 2,000
years of faulty
reasoning.
When Ricardo, who was Jewish,
married a Quaker, his father said,
“You are not our son”, but when
he accumulated $25 million, his
father said, “___ ___ ___ ___.”
Jean Say
John S. Mill
Alfred Marshall
David
Ricardo
Thomas
Malthus
Adam Smith
Keynes and Lydia
Classicals
Doomsday prediction [“Population will outpace food supply.”]
The Classical School includes Adam Smith, Jean Baptiste Say,
Jeremy Bentham, David Ricardo, Alfred Marshall, Thomas
Malthus, and John Stuart Mill.
AD AS
Summary of Major Classical Ideas
1. The economy is always close to or on its PPF. PL
2. There is no involuntary unemployment, meaning that
anyone who wishes to work can work at the going wage.
The economy is always close to or at full-employment.
YF
3. What output is produced will be demanded. Since the output
of an economy is the full-employment output, this implies that there
will be enough spending to purchase the full-employment.
4. Overall, the Classical economists believed that the market
economy is a self-adjusting mechanism that stabilizes itself at FE output.
This position rested on a foundation composed of:
A. Say’s Law, [“the supply (sale) of X creates the demand (purchase) of Y”]
B. Interest Rate Flexibility. “The leakage down the drain of saving is
returned through the spigot of investment.”]
C. Price Flexibility. [Cheaper prices = more AQD]
D. Wage Flexibility. [Lower wages = more workers being hired]
E. Quantity Theory of Money.
X V =
X Q
Classical – AS determines output
1.“Supply Creates Demand” [Say’s Law]
[Whatever output is produced will
be demanded. There will be enough
spending to purchase the output.
The AD curve is relatively stable
[if money supply is constant ]
AS
AD
Keynesian – AD determines output.
1.“Demand Creates Supply”[Keynes’s Law]
“S” doesn’t create “D”. [Supply was
there during the depression]. The “G”
might need to create some demand.
The AD curve is unstable. [because
of the volatility of investment ]
PL
AD
AS
Ig dropped 87%
from 1929-1933.
AD
PL
YF
*
YD 1933(25%) Y1929 (3%)
Keynesians
Classicals
2. Savings(leakage)=investment(injection)
This is so because of “interest rate
flexibility.” The interest rate is the cost
of borrowing. The interest rate alone
determines the level of investment.
“A leakage down the drain o
of saving is returned through
the spigot of investment.”
Investment depends on profit
expectations, tech. changes,
innovation, and interest rates.
2. Savers and investors are two
completely different groups who
save & invest for different reasons.
Saving is more related to income
than the interest rate. Investment
is more responsive to business
expectations, technological chgs,
& innovations than to changes in
the interest rate. [Gr. Depression]
“We save for down payments for cars
and houses, retirement, college,
illness, and a rainy day fund.”
S
Saving
C
C
45
Y1 Y2 Y3
Classicals
Keynesians
3. Savings increase with the
interest rate. Savers save
more at higher interest rates.
So, this is a direct relationship.
3. Savings are inverse to the
interest rate. You don’t have
to save as much at higher
interest rates to get the same
amount of money.
Repeat quote from previous slide:
“A leakage down the drain of A retirement goal of $100,000
saving is returned through the by the time you are 65 will
require less money at 12%
spigot of investment.”
than at 6%.
So again, savings [& consumption]
are a function of income, not
the interest rate.
“more consumption
and more saving”
More investment
Classicals say “Cheaper Excess
Supply Creates It’s Own Demand”
Classicals
PL
LRAS
AD1
4. Prices & wages are flexible
downward. By lowering prices,
AD2
businesses may lower profits,
but with flexible wages – they -20%
don’t have to pay the workers $10
as much so profits are the same.
$8
All factor prices [not just wages]
will adjust downward and all
factors would be fully employed.
*Price/wage flexibility is the
central difference.
YR YR Y*
SRAS1
SRAS2
Keynesians
4. Prices/wages are inflexible downward. [“Sticky”]
The economy is not flexible enough to allow wageprice flexibility. Monopolistic elements prevent
prices from falling quickly. Labor unions prevent
wages from falling quickly.
“Full Employment”
AD2
“Recession”
PL2
SRAS
3
AD1
“Sticky”
“The economy has fallen
and can’t get up.”
PL1
RDO2 RDO1 RDOFE Real Domestic Output
Because prices are “sticky down”, the resulting downturn is
worse because prices are higher which decreases output further.”
Classicals
5. AS=AD at FE equilibrium.
There is no involuntary unemployment. The economy will
naturally equilibrate to FE.
If you are unemployed, you
can always work at a lower
wage but prices have dropped.
Abnormal circumstances, like
wars or droughts, could prevent
full employment temporarily.
Adjustments within the market
system should restore the
economy to full-employment.
“In the long run, the
economy will correct.”
Keynesians
5. There is no mechanism
capable of guaranteeing full
employment. The classical
argument that wage and price
flexibility will ensure full
employment is thus flawed
by the fallacy of composition.
One market, like autos, might
adjust, but markets in the rest
of the economy may not
adjust at the same time.
“In the long run,
we are all dead.”
6. The economy is always
6. The economy is not always
close to or at full-employment.
close to or at full-employment.
The economy is self-regulating,
one that can “heal itself” if it
Will work
gets sick.
for Food
7. There is a very definite
management role for the “G”.
It is called fiscal policy, or
7. The government does not
have an economic management government spending and
taxes to stimulate the economy.
role to play in the economy.
Price Level
AD1
AS
PL1
Adam Smith
YF
RDO
[“Cheaper Excess Supply Creates Its Own Demand”]
With lower PL, the real-balance, AD2 AD1
interest rate, & foreign purchase
effects kick in and the surplus
disappears and FE is regained.
PL1
AS
Surplus
PL2
The government doesn’t
need to do anything, or
“Nobody touch nothing.”
YF
RDO
“The economy has
fallen and can’t get up.”
LRAS
AD1
SRAS
AD2
PL1
But prices may
not fall because
businesses don’t
want them to fall.
YR
Y1
RDO
“The economy has fallen and can’t get up.”
Even if prices drop…
LRAS
SRAS
Wages may not fall
[workers don’t want this]
so G intervention is needed.
Prices may not be
flexible down. Even
if they were, wages
may not drop so
easily either.
PL1
AD3
AD2
“G”
PL2
YR Y1
RGDP
• There are three views concerning the
shape of the aggregate supply curve.
• 1. New classical View
• 2. Keynesian View
• 3. Mainstream View
1. New Classical Version of AS
Price level
AS
O
RGDP
2. The Keynesian View
PRICE LEVEL
(average price per unit of output)
AS is horizontal up to full-employment
At this point (FE), AS becomes vertical
AS
P1
AD2
AD1
Y1
Y*
Real GDP
AD3
3. The Consensus or Mainstream View
• At low rates of unemployment AS is horizontal;
at high rates of unemployment AS is nearly vertical.
• In between, AS is gently upward sloping.
AS
• The closer to capacity , the greater the
risk that fiscal or monetary stimulus
will spill over into price inflation.
PRICE LEVEL
(average price per unit of output)
The Consensus or Mainstream View
AS
AD2
AD1
Inflation
PL2
PL1
accelerating
Keynesian segment
Unemployment declining
Y1
Y2 Real GDP
Effect of an increase in AD:
different versions of the SRAS curve
New Classical Version of AS
Price level
AS
0
RGDP
New Classical Version of AS
AS
Price level
AD1
PL
O
Y
RGDP
New Classical Version of AS
Price level
AD1
AD2
AS
PL2
P1
O
Y
RGDP
Aggregate Demand and Supply
The Extreme Keynesian Approach
Extreme Keynesian Version of AS Curve
Price level
AS
PL
0
RGDP
YF
Extreme Keynesian Version of AS
AS
Price level
AD1
PL
0
Y1
YF
RGDP
Extreme Keynesian Version of AS
AS
AD2
Price level
AD1
PL
O
Y1
Y2
YF
RGDP
Extreme Keynesian version of AS
AS
AD3
AD2
Price level
AD1
PL
O
Y1
Y2
YF
RGDP
Extreme Keynesian Version of AS
AD2
AD3
AD4
AS
Price level
AD1
PL4
PL1
0
Y1
Y2
YF RGDP
A Typical Short-run AS Curve
A Typical Short-Run AS Curve
Price level
SRAS
0
RGDP
A Typical Short-Run Mainstream AS Curve
“Modified Keynesian”
AD1
Price level
SRAS
PL1
0
Y1
RGDP
A Typical Short-run Mainstream AS Curve
AD2
AD1
SRAS
PL2
PL1
0
Y1
Y2
RGDP
A Typical Short-Run Mainstream AS Curve
AD1 AD2
AD3
SRAS
PL3
PL2
PL1
0
Y1
Y2
Y3
RGDP
A Typical Short-run Mainstream AS Curve
AD1
AD2 AD3
AD4
SRAS
PL4
PL3
PL2
PL1
0
Y1
Y2
Y3
Y4
RGDP
The “Wealth of Nations” was their Bible. Reigned supreme until Gr. Depression.
1. Say’s Law: Supply Creates Demand (centerpiece). People’s supply
of goods they produce will buy what they need. In a money economy,
interest rate flexibility insures that Say’s Law still holds. Although
people may save more, lower interest rates mean business will invest more.
2. Saving = Investment. “A leakage down the drain of saving would be
returned to the tub through the spigot of investment.” The interest rate
connected the drainpipe and the spigot.
3. Price-wage flexibility - Competition ensures price flexibility. With falling
prices, workers would accept lower wages and more would be hired.
Keynes focused much of his attack on the price-wage flexibility theory.
4. Involuntary unemployment was impossible.
Although wages would drop, prices had also, so your
purchasing power would be about the same.
OK, I’ll take this lower paying job
because with lower prices I can buy
the same things.
“A Recession, no problem,
just - - - “Do Nothing.”
No
“G”
Adam Smith
The Great Depression was a “collision of theory and fact.” Classical
economists kept saying, “In the long run, it will work itself out.” Keynes
replied, “In the long run, we are all dead.” “General Theory” was their Bible.
1. The economy seldom has full employment. Saving and
investment decisions may cause recessions. Using G & T, Keynes came
up with Keynes’s Law, “Demand Creates Its Own Supply.”
2. Prices and wages tend to be inflexible downward.
3. More saving does not equal more investment.
The interest rate does not connect the saving drain to the
investment spigot. Savers and investors save and invest for
different reasons.
Lower Interest Rates Mean You Need More Money.
Investment needed to provide $1,000 lifetime monthly income.
Interest Rate
Male 65
Female 65 [women live longer]
8%
5%
$103,750 $118,110
$128,220 $150,760
“The Classical Show was over as there were no self-correcting mechanisms.”
Keynesian
G & T
Revolution
“I’m going to
shoot Classical
theory down.”
Keynes
The Classical
show is over.
I’m a Classical.
AD2
LRAS
AD1
SRAS1
SRAS2
YR
Y*
1. If AD remains constant, the equilibrium price levels in the
OA
OB
short run and in the long run will be _____
& _____?
2. If the government uses fiscal policy to get out of the
OC
recession, price level will end up at _____?
“Chg in AQD”
“Chg in AD”
1. Price level changes cause
(shifts of the AD or AS curve/movements
from one point to another on a stable AD or AS curve[changes in AQD or AQS].
2. What 3 effects cause an increase or decrease in AQD?
Foreign purchase
Interest Rate
Real-balance ___________________,
_____________,
& ________________
effects.
change in price level
3. What will not shift the AD or AS curves? ________________
4. How does a decrease in price level affect the: real value of
wealth? (increase/decrease); consumption? (incr/decr); &
increases/decreases) (AD/AQD).
5. What does an increase in price level do to the demand for
money? (increase/decrease); affect interest rates? (incr/decr);
affect consumption? (incr/decr); & incr/decr) (AD/AQD).
6. A decreasing U.S. price level (incr/decr) U.S. exports and
(increases/decreases) (AD/AQD).
7. An increase in the national incomes of our trading partners
(incr/decr) our net exports which will lead to an (incr/decr)in (AD/AQD).
8. An appreciation of the dollar will (incr/decr) AS but (incr/decr) AD.
A depreciation of the dollar will (incr/decr) AS but (incr/decr) AD.
9. If the interest rate decreases because price level decreases
we will have an (increase/decrease) in (AD/AQD).
10. If the interest rate decreases but price level remains constant
we will have an (increase/decrease) in (AD/AQD).
11. If the PPC shifts out (more resources or technology), then
the (AD/AS) curve shifts (right/left).
12. Productivity (is/is not) affected when resource cost decreases.
13. What economic event brought the curtain down on the classical
The Great Depression
show?_______________________________________
What economic event brought the curtain down on the Keynesian
Stagflation
show? _______________________________________
Joseph Say
14. Who said “Suply creates demand?” ________________
15. During a depression, the policy of the (Classicals/Keynesians)
is “Do nothing.”
16. The (Classicals/Keynesians) believe government should
take an active role.
17. The (Classicals/Keynesians) said, “Savers save more at
higher interest rates.”
REP
C+Ig+G+Xn
PL2
E2
E2
Y2
Test Review on
AD/AS
and
Classical V. Keynesians
Caused by a “Change in PL”
Macro Law of Supply
[DIRECT ]
Macro Law of Demand
[Inverse]
AD
AS
PL1
PL1
PL2
PL2
AQD1
AQD2
AQS2
AQS1
Macro Law of Demand
[cause]
[effect]
PL decr; AQD incr.
PL incr; AQD decr.
“AD” refers to whole curve.
“AQD” is a pt on the curve
based on a particular PL.
AD
Reasons For Downsloping “AD” Curve
[if PL decreases, this happens]
1. Interest Rate Effect – more Ig
2. Real Wealth Effect – more “C”
3. Foreign Purchase Effect - foreigners buy more
PL1
Change in AQD
PL
AQD
1. Price Level change
2. Movement [up or down
the AD curve
3. Pt to pt [along the AD curve]
PL2
Inverse
relationship
2
AQD
1 AQDcurve”.
“AD” refers to the
“whole
[“all PLs”]
“AQD” refers to a “point on the curve”
based on a “particular price level.”
“Change in AD”
C
Consumption
Christina A.’s Concert
1. “Non price Level” change-either C, Ig, G, or Xn
2. “Whole AD curve” shifts
[There is a change in AQD but it is not caused by
a change in price level.]
Ig
AD1 AD2
AD3
G
PL
Let there be spend-
ing on infrastructure
XN Chevy
oil
[Exports-Imports]
AQD2 AQD1 AQD2 RDO
Change in AS
1. “Non price level change”. Either R,Anything
E, or P
that lowers
2. “Whole AS curve” shifts.
the cost of production
3. AQS changes but is not caused bywill
a change
PLright.
shift in
AS
AS Shifters(REP)
1. Resource cost
2. Environment [legal-institutional
environment for businesses change,
Increase in the affecting
availability
of Resources
production costs.
[subsidies, bus. taxes, regulations]
3. Productivity
PL
1. Lower business taxes
2. Decrease in regulations
3.
AS3 AS1 AS2
So – AS Shifters are
REP
You save money. We don’t require
dental or medical insurance. You
don’t have to pay us a pension
and we don’t take sick days. And
– we can dance.
Increase in subsidies
Environment
[Legal-institutional]
AQS3 AQS1 AQS2
Increase in Productivity
Productivity changes
(measure of average output)
How many outputs can be obtained from a certain
amount of inputs.
Productivity [4] =
real output (20 units)
Inputs (5 units)
An increase in productivity means more real output can be
obtained from the same inputs.
Does productivity alter per unit production cost? (If output is
20 units, input quantity is 5 units, and price of each input is $2)
Total input cost($10)[$2x5]
Per unit production cost [.50] =
Units of output (20)
Suppose output doubles to
40 units, input quantity is 5 units, & price of each unit is $2.
Per unit production cost [.25] = Total input cost($10)
Units of output (40)
AS - amount of real output firms will produce at each PL.
Higher price levels provide an incentive to produce more.
AS has three ranges:
Price level
1. Horizontal (Keynesian) 2. Intermediate 3. Vertical (Classical)
Horizontal
Vertical
[Classical]
Range
[Keynesian]
Range
Upsloping or
Intermediate
Range
RGDP
PL
AS
AS6
Price level
PL6
PL5
PL4
PL3
PL1
AD5
Vertical
[Classical]
Range
Pure
AD4
Inflation
AD2 AD3
AD1
Horizontal
Y1
Upsloping or
Intermediate
Range
Y2 Y3 Y4Y5 RGDP
Decreasing Supply That Causes A
Recession
Price Level
AS
AS
2
1
AD
P2
P1
Stagflation
Y2 Y1
RGDP
Increase in AD
[caused by “C+Ig+G+Xn”]
Increase in AD
AD2
LRAS
Price Level
1. Increase in Consumption
a. aggregate wealth increases
AD1
b. expected increase in inflation
c. low consumer debt
d. decrease in consumer taxes
e. decrease in interest rates
f. positive future income
2. Increase in Investment
a. decrease in interest rates
b. positive profit expectations
c. inventories are low
d. *business taxes are reduced
3. Increase in Government spending
a. on the military
b. on the infrastructure
c. on health care
4. Increase in Net exports [Xn]
A. Dollar depreciates
B. Trade partners incomes rise
YR
YF
Real Domestic Output, GDP
SRAS
Increase
in
AS
[caused by “REP”]
Increase in AS [“REP”]
Resource Cost [domestic]
a. More land, labor,
capital & entrepreneurs
b. # of sellers increase
c. Hiring fewer union workers
PL
Resource Cost [overseas]
c. Imported input prices decrease
d. Dollar appreciates
Environment [legal-institutional]
a. Increase in subsidies
b. Decrease in bus. regulations
c. *Decrease in business taxes
Productivity
Increase in productivity
AD
AS1
AS2
RGDP
Points of Emphasis for AD/AS Questions
1. Wages (labor), this is resource cost, so AS shifter.
2. Increase/decrease in union workers hired –
they get paid more – so labor, so AS shifter.
3. Appreciation/depreciation of a currency [either AD or AS]
a. Resource cost is part of REP, so it is AS shifter.
b. Exports are part of C+Ig+G+Xn, so it is AD shifter.
4. Regulations and subsidies [legal-institutional
Environment], part of REP, so they are AS shifters.
5. For all C+Ig+G+Xn, does the situation result in
an increase or decrease in AD & therefore GDP?
6. For REP, think of production costs –
if producers make more money, there is an increase in AS,
if producers make less money – there is a decrease in AS.
“Chg in AQD”
“Chg in AD”
1. Price level changes cause
(shifts of the AD or AS curve/movements
from one point to another on a stable AD or AS curve[changes in AQD or AQS].
2. What 3 effects cause an increase or decrease in AQD?
Foreign purchase
Interest Rate
Real-balance ___________________,
_____________,
& ________________
effects.
change in price level
3. What will not shift the AD or AS curves? ________________
4. How does a decrease in price level affect the: real value of
wealth? (increase/decrease); consumption? (incr/decr); &
increases/decreases) (AD/AQD).
5. What does an increase in price level do to the demand for
money? (increase/decrease); affect interest rates? (incr/decr);
affect consumption? (incr/decr); & incr/decr) (AD/AQD).
6. A decreasing U.S. price level (incr/decr) U.S. exports and
(increases/decreases) (AD/AQD).
7. An increase in the national incomes of our trading partners
(incr/decr) our net exports which will lead to an (incr/decr)in (AD/AQD).
8. An appreciation of the dollar will (incr/decr) AS but (incr/decr) AD.
A depreciation of the dollar will (incr/decr) AS but (incr/decr) AD.
9. If the interest rate decreases because price level decreases
we will have an (increase/decrease) in (AD/AQD).
10. If the interest rate decreases but price level remains constant
we will have an (increase/decrease) in (AD/AQD).
11. If the PPC shifts out (more resources or technology), then
the (AD/AS) curve shifts (right/left).
12. Productivity (is/is not) affected when resource cost decreases.
13. What economic event brought the curtain down on the classical
The Great Depression
show?_______________________________________
What economic event brought the curtain down on the Keynesian
Stagflation
show? _______________________________________
Joseph Say
14. Who said “Suply creates demand?” ________________
15. During a depression, the policy of the (Classicals/Keynesians)
is “Do nothing.”
16. The (Classicals/Keynesians) believe government should
take an active role.
17. The (Classicals/Keynesians) said, “Savers save more at
higher interest rates.”
REP
C+Ig+G+Xn
PL2
E2
E2
Y2
My teacher says
“Economics is just
common sense.”
I say, “Economics
is common sense
made difficult.”
The End