Aggregate demand and supply, multipliers, fiscal policy, and short-run versus long-run equilibrium.
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- What does the aggregate demand (AD) curve represent?
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The relationship between the price level and the quantity of real GDP demanded- Name three reasons why the AD curve slopes downward
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Wealth effect, interest rate effect, and exchange rate effect- The wealth effect causes consumption to ____ when the price level rises
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decrease- The interest rate effect occurs when a higher price level ____ the demand for money
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increases- The exchange rate effect causes net exports to ____ when the domestic price level rises
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fall- What causes the AD curve to shift rightward?
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Increased consumer confidence, higher investment expectations, increased government spending, or increased net exports- What causes the AD curve to shift leftward?
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Decreased consumer spending, lower investment expectations, decreased government spending, or decreased net exports- Distinguish between the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve
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SRAS slopes upward because input costs are sticky; LRAS is vertical at potential GDP because it depends on productive resources, not price level- Why does the SRAS curve slope upward?
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Production costs, especially wages, are sticky in the short run, so firms increase output when prices rise to earn higher profits- The long-run aggregate supply (LRAS) curve is vertical at ____
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potential GDP- When actual real GDP exceeds potential real GDP, an ____ gap exists
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inflationary- When actual real GDP falls short of potential real GDP, a ____ gap exists
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recessionary- To close a recessionary gap using fiscal policy, the government should increase spending or decrease taxes
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Increase spending or decrease taxes to shift AD rightward and close the gap- To close an inflationary gap using fiscal policy, the government should decrease spending or increase taxes
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Decrease spending or increase taxes to shift AD leftward and cool the economy- If the marginal propensity to consume is 0.75, the income multiplier is ____
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