Macro Unit 3 Key
Unit 3: Aggregate Demand and
Fluctuations in Outputs and Prices
demand (AD) and aggregate supply (AS) curves look and operate much like
supply and demand curves used in microeconomics. However, these macroeconomic
AD and AS
curves depict different things, and they change for different reasons than
microeconomic demand and supply curves.
AD and AS curves can be used to illustrate
changes in real output
and the price level of an economy.
downward sloping aggregate demand curve is explained by the wealth effect,
the income effect, and the foreign purchases effect.
aggregate supply curve is divided into three ranges: the horizontal or
the upward sloping or intermediate range, and the
vertical or classical range.
in the price level and output are illustrated by shifts and movements
the aggregate demand and supply curves.
in the aggregate demand can change the level of output and the price level
The determinants of AD
include changes in consumer spending, investment spending,
spending, and net export spending.
in aggregate supply can also change the level of output and the price
Determinants of AS include
changes in input prices, productivity, the legal institutional
environment, and the quantity of available resources.
in outputs can also be illustrated by the Keynesian expenditure-output
This model differs from the
AD/AS model because in the Keynesian model the price level
is assumed to
The Keynesian model
has fixed prices.
AD/AS model can be reconciled with the Keynesian expenditure-output
In the Keynesian
(horizontal) range of the AS curve, both models are identical.
The models differ in the intermediate
and vertical range of the AS curve.
spending is the part of AD that is independent of the current rate of
spending is that part of AD that depends upon the current rate of economic
multiplier is a number that influences the relationship of changes in
spending to changes in real GDP.
formula for calculating the multiplier is: M=1/MPS
multiplier results from subsequent rounds of induced spending that occur
autonomous spending changes.
economists believe the equilibrium levels of GDP can occur at less than or
than the full-employment level of GDP. Classical economists believe that long-run equilibrium
occur only at full employment.
policy consists of Economics actions that may increase or decrease
involve changes in Economics spending and taxing.
Economics uses an expansionary fiscal policy to try to increase or
actions involve changes in Economics spending and taxing.
Economics uses a contractionary fiscal policy to try to decrease
aggregate demand during
a period of inflation. The Economics may increase taxes, decrease spending, or do
a combination of the two.
fiscal policy means the federal Economics must take deliberate action or
new law changing taxes or spending. The automatic or built-in stabilizers change Economics
spending or taxes without new laws being passed or deliberate action being
balanced budget multiplier indicates that equal increases or decreases in
taxes and Economics
spending increase or decrease equilibrium GDP by an
amount equal to that increase or decrease.
can be explained by a decrease in aggregate supply.