Macroeconomics Chapter 9 Study Guide

The sequential headlines of chapter nine were “The Determination of Equilibrium Output (Income)” and “The Savings/Investment Approach to Equilibrium.” The equilibrium output equation as listed by Case, Fair, and Oster was that of Y = C + I + G and the “savings/investment approach to equilibrium” was S + T = I + G. The second heading defined S and T as “leakages” and I and G as “injections” (p. 170). Once these two equilibrium approaches were listed on page 170, the government spending multiplier was defined by Case, Fair, and Oster as this: “the ratio of the change in the equilibrium level of output to a change in government spending” (p. 171). This term was also

Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.

If there is a change in demand resulting in the shift of the demand curve. Price is not a factor in this curve. The shifting of the demand curve is due to some factors. As the demand increase the shift will be to the right and if there is a decrease the shift will be to the left.

Refer to Figure 18-4. The shift of the labor demand curve from D1 to D2 could possibly be explained by

Bank, T. W. (2014, June 01). Global Economic Prospects. Retrieved from Shifting priorities; building for the future: http://www.worldbank.org/en/publication/global-economic-prospects

Income – for an individual, the amount of money received through wages, rents, investments, pensions, and subsidy payments for a given period.

A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)

[pic] A decrease in production costs creates a downward shift in the short-run aggregate supply curve. Wages continue to fall until labor market equilibrium returns them to long term levels. This new equilibrium point is the point on the graph where D2 meets S2.

The long-run equilibrium of the economy is found where the aggregate-demand curve crosses the long-run aggregate-supply curve (point A). When the economy reaches this long-run equilibrium, the expected price level will have adjusted to equal the actual price level. As a result, the short-run aggregate-supply curve crosses this point as well.

This causes the price and the quantity move in opposite directions in a supply curve shift. Also, if the quantity supplied decreases at any given price the opposite will happen.

Three reasons the aggregate-demand curve slopes downward are the wealth effect, the interest-rate effect, and the exchange rate effect. The wealth effect explains that when the price level decreases, each consumer is wealthier because the real value of his or her dollar has increased. Wealthier consumers spend more, increasing the demand for consumption goods and services. Conversely, if the price level rises, the real value of the dollar will decrease, effectively making consumers poorer. Poorer consumers will spend less on consumption, decreasing the demand for goods and services.

Supply reflects the quantity of a good or service that a producer is willing and able to supply the market at a given price at a particular period of time. As price increases, the quantity a producer is willing and able to offer for sale in the market increases. Price is the endogenous (internal) factor impacting the quantity offered in the market. This causes a shift in the supply curve, which is the relationship between the quantity that all firms are willing to supply and alternative prices of the services.

Figure 28.2 shows an extension in aggregate demand. If the general price level falls people’s purchasing power will increase, the transactions demand for money will fall causing a reduction in interest rates and domestic goods and services will become more price competitive.

In principle, an economy is in equilibrium when the main macroeconomic variables tend to remain stable over time without external shocks. However, the conditions that this balance must fulfill differ according to the period in which we are analyzing the economy.

Overtime the economy will experience adjustment, where Y moves towards Yn. Looking at graph 2, the short run equilibrium is at point A, where Y>Yn and P>Pe. Since P>Pe wage setters will increase their expectations of Pe in the future from Pe to Pe’. This will shift the AS curve upward from AS