New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Chapter 20 Notes

by: Sydney King

Chapter 20 Notes Econ201

Sydney King

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

These notes cover chapter 20 in prepping for the final.
Principles of Macroeconomics
Naveen Sarna
Economics, Macroeconomics
75 ?




Popular in Principles of Macroeconomics

Popular in Economcs

This 4 page Bundle was uploaded by Sydney King on Sunday May 15, 2016. The Bundle belongs to Econ201 at University of Maryland taught by Naveen Sarna in Spring 2016. Since its upload, it has received 19 views. For similar materials see Principles of Macroeconomics in Economcs at University of Maryland.


Reviews for Chapter 20 Notes


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 05/15/16
Chapter 20: Aggregate Demand and Aggregate Supply 3 Key Facts about Economic Fluctuation 1. Economic fluctuations are irregular and unpredictable -fluctuations in the economy are called the business cycle -fluctuations reflect changes in business conditions -when realGDP grows, business is good and vice versa 2. Most macroeconomic quantities fluctuate together -real GDP is variable most commonly used to monitor short run changes -real GDP measures value of all final goods/services and total income -if real GDP falls then so does personal income, profits, consumer spending -when econ. Conditions falls, decline is due to reductions in spending on new factories, housing, inventories. 3. As Output falls, Unemployment Rises -when real GDP declines, rate of unemployment rises - firms choose to produce a lower quantity of goods, lay off workers Assumptions of Classical Economics -money doesn’t matter in a classical world – its only nominal change -people focus more on their job, what they can afford, etc -“Money is a veil” ( see nominal, but behind that real is what is important Reality of Short-Run Fluctuations -Most economists believe classical theory describes world in long run not short run Model of Aggregate Demand and Supply -short-run model focuses on behavior of 2 variables 1. output of goods/services as measured by real GDP(real variable) 2.avg level of prices as measured by CPI/GDP deflator(nominal variable) -vertical axis=price level -horizontal axis-quantity of goods/services produced in the economy -Aggregate demand-shows quantity of goods/services that households, firms, govt, and customers abroad want to buy -Aggregate Supply-quantity of goods/services that firms produce/sell at each level Aggregate Demand Curve - tells quantity of goods/services at any given price level - slopes downward - decrease in overall level of prices, raises quantity of goods/services demanded and vice versa Why AD Curve Slopes Downward - Y=C+I+G+NX Chapter 20: Aggregate Demand and Aggregate Supply - Assume govt spending is fixed but other variables depend on price level Price level and Consumption:Wealth Effect -when price level falls, dollars held in value, increases real wealth and ability to buy goods/services -decrease in price level increases real value of money and vice versa Price level and Investment – Interest Rate Effect - A lower price level reduces interest rate, encourages greater spending on investment goods, increases quantity of goods and services demanded - Higher price level raises the interest rate, discourages investment spending, decreases quantity of goods/services demanded Price level and Net Exports: Exchange Rate Effect -Fall in US price level causes US interest rates to fall- real value of dollar declines in foreign exchange markets. Depreciation stimulates US net exports/increases quantity of goods/services demanded -Increase in US price level, causes interest rates to rise, real value of dollar increases, appreciation reduces US net exports Why Aggregate Demand Curve Might Shift - Consumption: any event that changes how much people want to consume shifts the curve. Cut taxes-shift right, Raise Tax=shift left - Investment: quantity of goods/services demanded at any price level , shifts right. Cutting back on invest. Spending, shifts curve left. -tax policy: investment tax credit increases quantity, shifts right and repeal reduced investment and shifts left -money supply- decrease in MS raises interest rate, discourages investment spending -Govt purchases: most direct way to shift the AD curve, ex reducing purchases of new weapon system, AD shifts left and if building more highways, shifts right - Net exports: recession reduced net exports, recovery: shifts right The Aggregate Supply Curve -tells total quantity of goods/services that firms produce and sell at any given price level -in the long-run aggregate supply curve is vertical, short-run slopes upward Why Aggregate Supply Curve is Vertical in the Long Run -Real GDP depends on supplies of labor, capital, natural resources, and available technology to turn factors of production into goods and services. -Price level does not affect long run determinants of realGDP -Implies that quantity of output does not depend on level of prices(nominal ) Chapter 20: Aggregate Demand and Aggregate Supply Why the Long-Run Aggregate Supply Curve Might Shift - aka potential output or full employment output - for precision its called natural level of output bc it shows what econ. Produces when unemployment is at its natural/normal rate. - Natural rate is rate of production where economy gravitates in long run. - Shifts result in changes in labor, capital, natural resources, and technological knowledge Shifts from changes in labor -increase in immigration, leads to more workers, quantity of goods/services supplied increase, shift right -any change in natural rate of unemployment shift LRAS -Congress raise min. wage, natural rate of unemployment would rise, econ would produce smaller quantity of g/s, shift left. Shifts from changes in capital -increase in capital, increases productivity, and quantity of goods/services supplied, shifts right and vice versa. -doesn’t matter what type of capital (human /physical) all has same effect. Shifts from changes in Natural Resources - includes land, minerals, weather. - New mineral deposit shifts right, while change in weather patterns shifts left. Shifts from Changes in Tech Knowledge - advancements in technology have shifted LRAS right Sticky Wage Theory -SRAS slopes upward because nominal wages are slow to adjust to changing econ. conditions. - nominal wages are based on expected prices and do not respond immediately when actual price level turns to be different than expected. -stickiness gives incentive to produce less output when price level turns out lower than expected and to produce more when prices are higher than expected. Sticky Price Theory -prices adjust sluggishly due to costs in adjusting prices(menu costs) -menu costs include cost of printing and distributing catalogs and time to change price tags. Misperceptions Theory -changes in overall price level can mislead suppliers about what is happening in individual markets where output is sold. -misperceptions on relative prices - Quantity of output supplied= Natural level of output + a( Actual price level- expected Chapter 20: Aggregate Demand and Aggregate Supply - a determines how much output responds to unexpected changes in price level. Why SRAS Might Shift -Changes in labor, increase shifts right, decrease shifts left -Changes in capital- increase shifts right -Changes in Natural Resources-increase in availability shifts right and vice versa -Changes in technology- advances shift right -Changes in Expected Price Level- decrease shifts right, increase shifts left Effects of shifts in aggregate demand - (short run)shifts in aggregate demand cause fluctuations in output of goods/services - in long run, shifts iin aggregate demand affect overall price level but not output - policy makers influence aggregate demand, they can mitigate severity of economic situations Effects of shifts in aggregate supply - can cause stagflation, combo of recession(falling output) and inflation( rising prices) - policy makers who can influence aggregate demand can mitigate impact on output but only at cost of exacerbating problem of inflation.


Buy Material

Are you sure you want to buy this material for

75 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Amaris Trozzo George Washington University

"I made $350 in just two days after posting my first study guide."

Bentley McCaw University of Florida

"I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.