Macroeconomics Midterm 1 - Part 2
Terms
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- Aggregate Supply (AS) curve
- shows for each given price level, the quantity of output firms are willing to supply
- Aggregate Demand (AD) curve
- shows for each given price level, the level of output at which the goods market and money markets are in equilibrium
- Nominal GDP
- measures the value of output in prices of the period
- Name the 3 main prices indexes
-
GDP deflator
Consumer Price Index
Producer Price Index - Nominal Interest Rate
- Expresses payment in current dollars on a loan or other investment
- Real Interest Rate
- return on investment measured in dollars of constant value - equal to the difference b/w nominal and the rate of inflation
- AD
- Total amount of goods demanded in the economcy
- If output > AD then...
- there is an unplanned inventory investment - as excess inventory grows, firms cut back production
- Marginal propensity to consume (little c/slope)
- increase in consumption for each $1 increase in disposable income
- If demand (AD) > output...
- Income below Y0 - inventory is declining so production increases; IU<0
- Contractionary policies
- reduce spending; raise interest rates
- Expansionary policies
- designed to stimulate spending
- endogenous variables
- (dependent variables) the particular value is determined w/in the economy by economic forces or value is determined w/in the model
- Abar =
- =
- Is the change in income greater than or less than the change in government expenditure?
- Given cbar>0 and 0<c<1, the slope of the AD schedule is less than one. An autonomous change in expenditure such as an increase in govt expenditure will result in an even greater change in income. This property is known as the multiplier.
- The 45 degree line (AD=Y) represents
- the locus of points of admissable levels of equilibrium for aggregate demand and output