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WMU ECON 2010 - Aggregate Demand and Aggregate Supply Study Guide

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Name: ______________________ Class:______________________ Aggregate Demand and Aggregate Supply Study Guide Demand Supply Definition of Aggregate Demand Curve: A curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level. Definition of Aggregate Supply Curve: A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Monetary Policies Used to Fix a Recession (Expansionary): Federal Reserve Only Open Market Operations – Buy Bonds (Buy Big) Interest Rates – Lower Interest Rates to make borrowing more attractive Required Reserve Ratio – Lower ratio at financial institutions to be able to lend more money Discount Rate – Fed lowers the Discount Rate to help banks lend more money (last resort) Monetary Policies Used to Fix Inflation (Contractionary): Federal Reserve Only Open Market Operations – Sell Bonds (Sell Small) Interest Rates – Increase Interest Rates to make borrowing less attractive Required Reserve Ratio – Increase ratio at financial institutions to be able to lend less money Discount Rate – Fed increases the Discount Rate to deter banks from borrowing money (last resort) Fiscal Policies Used to Fix a Recession (Expansionary): President/Congress Only Government Expenditure – Increase Taxes – Decrease Fiscal Policies Used to Fix Inflation (Contractionary): President/Congress Only Government Expenditure – Decrease Taxes – Increase List the factors that shift LRAS curve to the right. Increased immigration, a decrease in the minimum wage, less generous unemployment insurance, an increase in the capital stock, an increase in the average level of education, a discovery of new mineral deposits, advances in technology, and removal of barriers to international trade. What two factors does the Phillips Curve address? Unemployment and Inflation High Inflation/Low Unemployment = Inflation Low Inflation/High Unemployment = Recession Desirable Inflation/Desirable Unemployment = Full Employment/LRAS/LRPC Desirable Inflation = 2% Desirable Unemployment = 4-6% Full Employment = 4 – 6% Unemployment What components create the AD curve? Nation’s GDP or the Expenditure Approach of GDP: C + I +G+(X-M) Consumer Expenditure + Business Investments + Government Expenditure + (Net Exports – Exports – Imports) What components create the AS curve? The Income Approach of GDP Nation’s Cumulative Factors of Production for all Businesses – Land, Labor, Capital and Entrepreneurship What two disequilibrium states of the economy are trying to be avoided and are monitored by Economists? Recession and InflationAD and SRAS Analysis Use the three steps below in analyzing demand and supply. Using the graphs below in the AD and SRAS practice, please complete the following: 1) First, draw the AD curve, SRAS curve, and label the equilibrium. 2) Second, determine the change: a) Is it a change in SRAS, a change in AD, or a change in both? b) Define the change: - Was it an SRAS shifter? Was it an AD shifter? - Did it increase (shift to the right) or decrease (shift to the left)? - Identify the shifter (see table below): AD Shifters SRAS Shifters 1. Change in Consumption 1. Changes in Labor 2. Change in Business Investment 2. Changes in Capital 3. Change in Government Expenditure 3. Changes in Natural Resources 4. Change in Imports 4. Changes in Technology 5. Change in Exports 5. Changes in Expected Price Level 3) Third, draw the change that occurred. Where is the price and quantity after the shift? Label the new equilibrium. AD and AS Practice Use Economic Analysis to determine what happens to the price and quantity of computer games in each scenario. # Change Graph Economic Analysis 1. President Trump imposes tariffs. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Expected PL 3. After: PL Increases Output Decreases 2. A new oil shale begins production in Texas. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Natural Resources 3. After: PL Decreases Output Increases3. Amazon increases their minimum wage to $15 per hour. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Labor 3. After: PL Increases Output Decreases 4. The U.S. military uses an additional $1 billion to aid Venezuelan medical care. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Government Expenditure 3. After: PL Increases Output Increases 5. Google requires that all employees possessing a Bachelor’s degree return to school to earn their Master’s degree. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Labor 3. After: PL Decreases Output Increases 6. Amazon adds 10,000 drones to their warehouses to aid in order fulfillment. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Technology 3. After: PL Decreases Output Increases 7. GM lays off 15% of their salaried workforce in the U.S. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Change in Labor 3. After: PL Increase Output Decrease 8. GM lays off 15% of their salaried workforce in Canada. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD No Change Increase or Decrease Shifter 3. After: PL _____ Output_____9. Comcast cable reduces their cable costs by 50% to their customers. (Double Shifter) 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Change in Consumption/Change in Technology 3. After: PL Indeterminate Output Increases 10. China agrees to U.S. trading requirements and the tariffs are removed. 1. Draw and Label Equilibrium: 2. The Change: SRAS or AD Increase or Decrease Shifter Changes in Expected PL 3. After: PL Decreases Output


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