AP Macro aggregate demand and aggregate supply study guide

What are the components of aggregate demand?

C + I + G + (X - M) where: C = consumption, I = investment, G = government spending, X = exports, M = imports.

Fill in the blank: Aggregate demand decreases when ____ increases.

interest rates

True or False: A decrease in consumer confidence shifts AD right.

False - It shifts AD left.

How does government spending affect aggregate demand?

Increases aggregate demand directly. Example: Infrastructure investment boosts AD.

What causes shifts in aggregate demand?

Determinants include: - Consumer spending - Business investments - Government policies - Net exports.

If taxes increase, what happens to aggregate demand?

Aggregate demand decreases due to reduced consumer spending.

Comparison: Aggregate demand vs. Aggregate supply.

AD: total spending in the economy. AS: total production at different price levels.

How do foreign incomes influence aggregate demand?

Higher foreign incomes increase U.S. exports, shifting AD right.

What is the relationship between price levels and aggregate demand?

Inverse relationship: Higher price levels decrease quantity demanded. $\displaystyle AD: P ext{ decreases} ightarrow Q_d: ext{ increases}$.

Increase in investment spending shifts AD to the ____.

right

What effect does a strong dollar have on aggregate demand?

It typically decreases AD by making U.S. exports more expensive.

True or False: A rightward shift in AD always indicates economic growth.

False - It can indicate inflation if not matched by AS.

Fill in the blank: Changes in consumer expectations about the future can shift AD ____.

right or left, depending on optimism or pessimism.

What happens to AD during a recession?

AD typically decreases due to reduced consumer and business spending.

Example: How does a tax cut affect AD?

Increases AD by raising disposable income, leading to more consumption.

What does 'net exports' represent in AD?

Exports minus imports, affecting overall demand for U.S. goods.

What is short-run aggregate supply (SRAS)?

SRAS represents total production at different price levels when some input prices are fixed.

What is long-run aggregate supply (LRAS)?

LRAS reflects the total output when all prices, including wages, are flexible and at full employment.

True or False: SRAS can shift due to changes in resource prices.

True. Changes in resource prices can shift SRAS left or right.

Fill in the blank: An increase in _____ shifts SRAS left.

production costs.

What causes a rightward shift in SRAS?

Decreased input costs, technological advancements, or increased productivity.

Short-run vs. Long-run: Which is more influenced by resource prices?

Short-run aggregate supply (SRAS) is more influenced by resource prices.

What does a leftward shift in LRAS indicate?

A decrease in the economy's potential output, often due to resource depletion.

Cause → Effect: What happens when the government increases regulations?

Effect: SRAS shifts left due to increased production costs.

What are the determinants of long-run aggregate supply?

Factors include labor force, capital stock, technology, and natural resources.

Short-run aggregate supply can be represented as:

SRAS is upward sloping due to fixed input prices in the short run.

What happens to SRAS if business taxes decrease?

SRAS shifts right, indicating an increase in supply as production becomes cheaper.

True or False: LRAS can shift due to changes in technology.

True. Technological advancements can shift LRAS right.

What does the vertical LRAS curve represent?

The economy's potential output at full employment, regardless of price level.

Example: If wages increase, what happens to SRAS?

SRAS shifts left as production costs rise, decreasing supply.

What is the impact of an increase in labor productivity?

SRAS shifts right, allowing more output at the same price level.

Comparing SRAS and LRAS: Which is affected by price level changes?

SRAS is affected; LRAS is not affected by price level changes.

Define market equilibrium.

Market equilibrium occurs when quantity demanded equals quantity supplied at a specific price level.

True or False: Increase in AD raises price levels.

True. An increase in aggregate demand typically leads to higher price levels and increased output.

What happens when AD shifts right?

Price levels rise and real GDP increases, leading to potential inflation.

What is the equilibrium price?

The equilibrium price is the price at which the quantity of goods demanded equals the quantity supplied.

Fill in the blank: A decrease in AS leads to ______.

higher price levels and lower output.

Cause → Effect: Increase in aggregate supply.

Leads to lower price levels and higher output in the economy.

Compare: Short-run vs. Long-run equilibrium.

Short-run: prices are sticky; Long-run: prices are flexible and adjust fully.

What shifts the aggregate demand curve?

Changes in consumer spending, investment, government policies, and net exports.

How do expectations affect price levels?

If consumers expect higher future prices, current demand increases, shifting AD right.

Calculate equilibrium: AD = $\displaystyle 1000, AS =$1000.

Equilibrium price level is achieved at this output where AD equals AS.

True or False: A leftward AS shift causes deflation.

False. It usually causes inflation due to higher costs of production.

What is the effect of a recession on equilibrium?

AD decreases, leading to lower price levels and reduced output.