The amount of output that can be produced with a given quantity of labor, often measured as output per worker, is called productivity.
Missing Word
productivity
Productivity measures output relative to the labor used to produce it. Productivity growth is the most important long-run factor shifting aggregate supply to the right, raising both SRAS and potential GDP.
Category: Aggregate Supply
Question 2
During the Great Depression, the United States experienced deflation, a fall in the overall price level.
Missing Word
deflation
Deflation is a decline in the overall price level, the opposite of a rising price level. It occurred during the Great Depression, when aggregate demand collapsed and output fell far below potential.
Category: Prices and the Price Level
Question 3
In the aggregate demand formula, the letter I stands for investment, business spending on physical capital such as machinery and new buildings.
Missing Word
investment
Investment is spending on physical capital, and it is one of the four components of aggregate demand. Business confidence and interest rates are major influences on it, so changes in either can shift AD.
Category: Components of Demand
Question 4
When the U.S. price level rises while prices abroad stay the same, imports become relatively cheaper for Americans, so spending on them rises.
Missing Word
imports
Imports are goods and services produced abroad and bought by domestic buyers. Under the foreign price effect, a higher domestic price level makes imports relatively cheaper and exports relatively expensive, so net exports fall and the quantity of aggregate demand declines.
Category: Components of Demand
Question 5
When aggregate demand shifts right while the economy is already on the steep part of the SRAS curve, firms cannot expand output much, so the main result is inflation.
Missing Word
inflation
Inflation is a rise in the overall price level. Near potential GDP, firms cannot produce much more, so extra demand shows up mostly as a higher price level, the demand-side source of inflationary pressure. A single shift gives a one-time rise, and inflation persists only if aggregate demand keeps shifting right.
Category: Prices and the Price Level
Question 6
The 1970s combination of a stagnant economy, high unemployment, and rapidly rising prices is known as stagflation.
Missing Word
stagflation
Stagflation means stagnant growth together with high inflation. In the AD/AS model it results from leftward shifts in SRAS, such as the oil price increases of the 1970s, which lower output and raise the price level at the same time.
Category: Prices and the Price Level
Question 7
In the aggregate demand formula, the letter X stands for exports, the goods and services produced at home and sold to buyers in other countries.
Missing Word
exports
Exports are domestically produced output bought by foreign buyers, so they add to the demand for what the economy produces. They enter aggregate demand as X, and imports are then subtracted as M, so net exports equal X - M.
Category: Components of Demand
Question 8
The flat, far-left portion of the SRAS curve, where real GDP is far below potential, is called the Keynesian zone.
Missing Word
Keynesian
The Keynesian zone is where the economy is in recession with high cyclical unemployment and many idle resources. Shifts in aggregate demand there mainly change output and unemployment, with little effect on the price level.
Category: SRAS Zones
Question 9
Keynes' law, which reverses the order of the words in Say's law, holds that demand creates its own supply.
Missing Word
supply
Say's law holds that supply creates its own demand, and Keynes' law turns that around. Keynes' law is seen as applying fairly well in the short run of a few months to a few years, when total demand can fall short of what the economy is able to produce.
Category: Schools of Thought
Question 10
Tax cuts for individuals tend to raise consumption, the household spending shown as C in the aggregate demand formula.
Missing Word
consumption
Consumption is household spending on goods and services and is the C in C + I + G + X - M. A tax cut leaves households more after-tax income, so consumption rises and AD shifts to the right.
Category: Components of Demand
Question 11
Under the wealth effect, a higher price level lowers the real buying power of the savings people have built up, so they feel poorer and cut back on spending.
Missing Word
wealth
The wealth effect is one of the three reasons the AD curve slopes downward, along with the interest rate effect and the foreign price effect. A higher price level shrinks what stored-up savings can buy, so households spend less and the quantity of real GDP demanded falls.
Category: AD/AS Model Basics
Question 12
The price level and real GDP at which the AD and AS curves cross are called the equilibrium values.
Missing Word
equilibrium
Equilibrium is the point where the quantity of real GDP demanded equals the quantity supplied. At a price level below it, demand exceeds supply and prices tend to rise, and above it, supply exceeds demand.
Category: AD/AS Model Basics
Question 13
The LRAS curve is vertical at potential GDP because in the long run the price level has no effect on how much real GDP the economy produces.
Missing Word
vertical
A vertical line shows no relationship between the variable on the vertical axis and the one on the horizontal axis. The LRAS curve is vertical because, in the long run, output is limited to potential GDP no matter what the price level is.
Category: AD/AS Model Basics
Question 14
Counting X - M as a single component, aggregate demand is made up of 4 components of spending.
Missing Word
4
Aggregate demand has 4 components: consumption, investment, government spending, and net exports, which equal exports minus imports. Together they form C + I + G + X - M.
Category: Components of Demand
Question 15
Purchases of goods and services by federal, state, and local authorities enter aggregate demand as G, which stands for government spending.
Missing Word
government
Government spending is the G in the aggregate demand formula. An increase in government spending raises total spending at every price level and shifts AD to the right, while a cut shifts it to the left.
Category: Components of Demand