sales and profits fall
According to classical macroeconomic theory, changes in the money supply affect
nominal variables, but not real
If money is neutral, then changes in the quantity of money
do not affect real output.
Most economists believe that in the short run
real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run
Aggregate demand includes
the quantity of goods and services the government, households, firms, and customers abroad want to
The effect of an increase in the price level on the aggregate-demand curve is represented by a
movement to the left along a given aggregate-demand curve
Which of the following effects helps to explain the slope of the aggregate-demand curve?
- the exchange-rate effect
- the wealth effect
- the interest-rate effect
A decrease in the price level
increases the quantity of goods and services
The aggregate quantity of goods and services demanded changes as the price level rises because
real wealth falls, interest rates rise, and the dollar appreciates
The aggregate quantity of goods and services demanded changes as the price level falls because
real wealth rises, interest rates fall, and the dollar depreciates.
Other things the same, an increase in the price level induces people to hold
more money, so they lend less, and the interest rate
When the price level falls
the interest rate falls, so the quantity of goods and services demand
when the interest rate falls
firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding.
when the price level falls, households
want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.
as the price level rises, the exchange rate
rises, so exports fall and imports rise.
Other things the same, if the price level falls, domestic interest rates
fall, so domestic residents will want to hold more foreign bonds.
Other things the same, if the price level falls, people
increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.
Other things the same, if the price level rises, people
decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.
Other things the same, if the S. price level falls, then
US. residents want to buy more foreign bonds. The real exchange rate falls.
When the dollar depreciates, each dollar buys
ess foreign currency, and so buys fewer foreign goods.
When the dollar appreciates, US.
net exports fall, which decreases the aggregate quantity of goods and services demanded.
As the price level rises,
the exchange rate rises, so net exports fall.
As the price level falls,
the exchange rate falls, so net exports rise.
Other things the same, an increase in the price level causes the interest rate to
increase, the dollar to appreciate, and net exports to decrease.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right.
Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to
decrease consumption, which shifts aggregate demand left.
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right.
If countries that imported goods and services from the United States went into recession, we would expect that S. net exports would
fall, making aggregate demand shift left.
If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer US. bonds,
the dollar would depreciate which would cause aggregate demand to shift right.
The long-run aggregate supply curve shifts left if
there is a natural disaster.
The discovery of a large amount of previously-undiscovered oil in the S. would shift
the long-run aggregate-supply curve to the right.
The aggregate supply curve is
vertical in the long run and slopes upward in the short run.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
production is more profitable and employment rises.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
production is less profitable and employment falls