WGU D089 Module 8

WGU D089 Module 8 Leave the first rating Students also studied Terms in this set (71) Social SciencesEconomics Macroeconomics Save D089 - Module 1 Teacher 37 terms WGU_Econ_CI_Team Preview Principles of Economics - D089 TES...32 terms wtfitsmeghan11 Preview WGU - D089 Principles of Economic...263 terms Marcel_GilesPreview WGU D 129 term Trac Draw a graph of aggregated demand. Make sure to label the axis Vertical axis is Price and Horizontal Axis is GDP How does the quantity of GDP demanded change as the price level in the economy increases? Illustrate this on your graph It leads to a lower quantity of spending on domestic goods and services decline List and explain the components of aggregate demand Consumption spending when disposable income increases, so does consumption spending and AD shifts to the right. When disposable income decreases so does consumption spending and AD shifts to the left.Investment spending Firms make investment decisions based on how the goods will affect their profits, Decreases in investments causes the AD to shift tot he left and increases in investments cause the AD to shift to the right

government spending:

spending on the net exports or exports minus imports. C + I +G + x - M Identify the factors that shift ADWealth effect, interest rate effect, and foreign price effect Draw a graph of short run AS, make sure to label the axis Vertical is price level and horizontal is real GDP Why is the short run AS curve SRAS upward sloping? As price increases so does AS

Why is the long run AS curve (LRAS) vertical?Level of real GDP supplied does not change with price What is the relationship between the LRAS, potential GDP, and full-employment GDP?LRAS is also know as potential GDP, when an economy is utilizing all labor and assets to their fullest then unemployment is low Identify the factors that shift the LRAS curveProductivity growth, how much output can be produced with a given quantity of labor or capital Identify the factors that shift the SRAS curveAnything that affects the LRAS to shift, will cause the SRAS to shift in the same direction, improvement in technology, reduction in wages, increase in wages, loss of productivity or increase in fuel prices.Use the AS-AD model to explain what happens in each of the following scenarios. In each case begin with a graph showing the economy in the long run equilibrium. Move the appropriate curve. Identify the new equilibrium explaining what happens to price and GDP. In each case identify whether the change results in an expansionary or recessionary gap.

• Consumer confidence Increases
• Wages increase
• An increase in capital generates higher labor

productivity Aggregate demand-aggregate (AD-AS) model Model that shows what determines total supply or total demand for the economy and how total demand and total supply interact at the macroeconomic level.Aggregate Supply (AS)Total supply of goods and services available to a particular market form produces.Aggregate Demand CurveShows the total spending on domestic goods and services at each price level, Demonstrates the conditions that determine output and prices and changes in output and prices over time. Reflects the relationship between aggregate expenditure on final goods and services and the general price level. Aggregate means total.Aggregate Demand determined?price level of goods, Consumer price index, shows total spending on domestic goods and services.

Downward Slope of the AD Curve3 key reasons for downward slope is wealth effect, interest rate effect and foreign price effect.Wealth effect holds that as the price level increases the buying power of money is depleted to some extent by inflation, when prices fall buying power of money increases making people feel wealthier. Contributes to the negative relationship between the price level and aggregate GDP demanded.Interest rate effect: reflects that as prices for outputs rice the same purchases will take more money or credit to accomplish. More demand for money and credit will push interest rates higher, higher interest rates will reduce borrowing by businesses for investment purposes and reduce borrowing by households.Foreign Price Effect: Points out that if prices rise in the US while remaining fixed in other countries goods in the US relatively more expensive compared to goods in the rest of the world. US exports will be relatively more expensive and the quantity of exports will fall. US imports cheaper so quantity of imports will rise.Components of Aggregate DemandConsumption spending (C), Investment spending (I), Government Spending (G) and spending on net exports (NX) or exports (X) minus imports (M). Provide a useful means of sorting buyers into groups whose purchasing decisions respond to similar factors. Sorts buyers into groups whose purchasing decisions responding to similar factors. Sorting buyers is essential due to an increase or decrease in any one of these components will shift the AD curve.Increase or Decrease in AD causes whatShift to the right of the curve is caused by an increase. Decreases causes the curve to shift left.Variables that causes the shift in the AD curve:Income taxes, interest rates, expectations and exchange rate, these cause the AD changes in the components of demand for the real GDP like household consumption, business investment, government spending and net exports.ConsumptionDisposable income is primary determinant of consumption spending, increase in disposable income increases consumption spending, Increase in AD is expected when income increase or taxes decrease this increase is seen as a rightward shift, AD would decrease if taxes increase or income falls this decrease is leftward movement. Changes in consumption may also be caused by changes in interest rate, expectations or confidence.InvestmentInterest rates and expectation strongly influence business spending on capital goods, High expectations for the future on the economy a firm may decide to buy new machinery to expand output in anticipation of increased profits, decrease in investment spending shifts the AD to the left, GovernmentInterest rates affect borrowing by local and state government's in the financing of roads, schools, hospitals and other public facilities, Low interest rates the government may increase borrowing and increase spending shifting the AD to the right.Net Exports2 things impact net exports: Foreign income and exchange rate. High foreign income increase demand for exports and shifts the AD to the right, lower foreign income will reduce demand for exports shifting the AD to the left.Net exports influenced by the exchange rate when increases the price of the dollar is higher this reduces the US exports and increases US imports shifting the AD to the left, lower exchange rate would shift the AD to the right

aggregate supply curvethe total quantity of output (i.e. real GDP) that firms will produce and sell at each price level.Rise in confidence?higher consumption and investment demand will mean an outward shift in the AD curve and a move of equilibrium from E0 to E1, leads to higher quantity of output and higher price level Factors Affecting Consumer and Business Confidence Reflect macroeconomic realities: confidence is usually high when the economy is growing briskly and low during a recession. Economic confidence can rise or fall due to the risk of war, election results, foreign policy events, or pessimistic prediction about future by prominent public figure.What is a reason for the downward slope of the aggregate demand curve?Foreign price effect An economist is conducting research on the total amount of money spent for goods and services at different price levels within a single economy.What is the economist studying?Aggregate demand A recent recession has resulted in declining investment and consumer spending. New austerity measures have prevented the government from increasing spending.Which effect will this action have?A left shift in the aggregate demand curve The national government has begun a new deficit program that it hopes will increase domestic spending on goods and services.Which effect will this action have?A right shift in the aggregate demand curve What 2 periods are evaluated when studying aggregate supply (AS)?The short run and Long run.What is short run?Time frame in which input prices are fixed and there can be disequilibrium in the factors market. Is a positive relationship between the quantities of goods and services businesses are willing to produce and price level in the economy.What is Long Run?Price adjustment is complete and all factor markets have cleared, relationship between quantity of real GDP supplied and the price level is different. Quantity of real GDP supplied is independent of the price level.Potential GDPthe maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions