Understanding Macroeconomics

Topics: Supply and demand, Inflation, Macroeconomics Pages: 3 (495 words) Published: December 17, 2012
Recessions: periods of falling real incomes and rising unemployment Depressions: severe recessions (very rare)
Short-run economic fluctuations are often called business cycles FACTS:
1. Economic fluctuations are irregular and unpredictable. 2. Most macroeconomic quantities fluctuate together.
3. As output falls, unemployment rises.
The AD curve shows the quantity of all g&s demanded in the economy at any given price level. Y = C + I + G + NX
When an increase happened to C,I,G,(NX or EX) - the AD curve shifts right. Why the AD Curve Might Shift ?
* Changes in C
* Stock market boom/crash
* Preferences re: consumption/saving tradeoff
* Tax hikes/cuts
* Changes in I
* Firms buy new computers, equipment, factories
* Expectations, optimism/pessimism
* Interest rates
* Investment Tax Credit or other tax incentives
* Changes in G
* Government spending, e.g., defense
* Regional & local spending, e.g., roads, schools
* Changes in NX
* Booms/recessions in countries that buy our exports
* Appreciation/depreciation resulting from international speculation in foreign exchange market

Question :
What happens to aggregate demand in each of the following cases? 1. The interest rate rises
I falls, AD curve shifts left
2. Wealth falls
C falls, AD curve shifts right
3. The Dirham depreciates relative to foreign currencies
NX increases, AD curve shifts right
4. Households expect lower prices in the future
C falls, AD curve shifts left
5. A ten-year-old investment tax credit expires.
I fall, AD curve shifts left
6. The government builds a new road.
G increases, AD curve shifts right
7. Sales taxes are lowered.
C increase, AD curve shifts right
The AS curve shows the total quantity of g&s firms produce and sell at any given price level.

The natural rate of output (YN) is the amount of output the economy produces when...
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