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Ch. 27 Aggregate supply and Aggregate Demand, The quantity of real GDP…

- - - - Qty of labor employed
        
        Depends on decision made by households and firms about the supply of and demand of labor
      - Qty of physical and human capital
      - State of technology
    - - Full employment
        
        Qty of real GDP supplied is potential GDP, which depends on the full-employment quantity of labor
      - Above full employment
      - Below Full employment
  - - - relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment.
      - Along the long-run aggregate supply curve, as the price level changes, the money wage rate also changes so the real wage rate remains at the full-employment equilibrium level and real GDP remains at potential GDP.
    - - Relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.
  - - - Can increase for:
        
        An increase in the full-employment qty of labor
        
        An increase in the qty of capital
        
        An advance in technology
      - An increase can change in long-run and short-run aggregates
    - - When the money wage rate (or the money price of any other factor of production such as oil) changes, short-run aggregate supply changes but long-run aggregate supply does not change
      - Can change because:
        
        Departures from full employment
        
        Expectations about inflation
- - - - The price level
      - Expectations
      - Fiscal policy and monetary policy
      - The world economy
    - - When the price level rises and other things remain the same, the quantity of real GDP demanded decreases
  - - - Curves downward because of:
        
        Wealth effect
        
        When prices level rises but other remain, REAL wealth decreases
        
        REAL wealth is measured in the amount of money in the bank/bonds/stocks/other assets measured in terms of the goods/services that money/bonds/stocks WILL buy
        
        If REAL wealth decreases people will save more, meaning DECREASING consumption
        
        Substitution effects
        
        When price rises and other things remain, INTEREST RATES rise
        
        Involves changing timing of purchases of capital and consumer durable goods INTERTEMPORAL SUBSTITUTION EFFECT
  - - - Expectations
        
        An increase in expected future income increases the amount of consumption goods that people plan to buy today and increases aggregate demand.
      - Fiscal policy and monetary policy
        
        Taxes and transfer payments and purchasing goods/services are fiscal policy
        
        Federal Reserve attempt to influence the economy by changing the interest rates and qty of money monetary policy
      - The world economy
        
        Exchange rate
        
        Foreign income
- - - - Occurs when real GDP = potential GDP
    - - Occurs when the qty of real GDP = qty of real GDP demand
- - - - Business cycle fluctuations are the efficient responses of a well-functioning market economy
    - - Aggregate demand Fluctations
        
        Technological advances are the most significant on both AS and AD
        
        The money wage rate lies behind short-run AS curve is instantly and completely flexible
    - - Emphasizes the potential for taxes to stunt incentives and create inefficiency
      - By minimizing the disincentive effects of taxes, employment, investment, and technological advance are at their efficient levels and the economy expands at an appropriate and rapid pace.
  - - - Expectations are more significant on AD, based on herd instincts (way of pessimism about future profit that will lead to recession)
    - - Money wage behind short-run AS supply curve is very sticky in a downward fashion
    - - Calls fiscal and monetary policy to actively offset changes in AD that bring recession, if so full employment can be restored
  - - - Qty of money is most significant influence
      - determined by Feds
      - All recessions result from inappropriate monetary policy
    - - Same as Keynesian view
    - - Taxes should be kept low to avoid disincentive effects, provided that qty of money has steady growth path, no active stabilisation is needed