Page 33 - Krugmans Economics for AP Text Book_Neat

Section 4 Summary
Each Section
ends with a S ection 4 Review
comprehensive Summary
review and 1. The consumption function shows how an individual 9. Changes in commodity prices, nominal wages, and pro-
problem set household’s consumer spending is determined by its ductivity lead to changes in producers’ profits and shift
current disposable income. The aggregate consump- the short -run aggregate supply curve.
tion function shows the relationship for the entire 10. In the long run, all prices, including nominal wages, are
economy. According to the life-cycle hypothesis, house-
flexible and the economy produces at its potential out-
Key Terms holds try to smooth their consumption over their life- put. If actual aggregate output exceeds potential out-
times. As a result, the aggregate consumption function
put, nominal wages will eventually rise in response to
shifts in response to changes in expected future dispos- low unemployment and aggregate output will fall. If po-
Marginal propensity to consume (MPC), p. 159 Interest rate effect of a change in the aggregate Demand shock, p. 191
able income and changes in aggregate wealth. tential output exceeds actual aggregate output, nominal
Marginal propensity to save (MPS), p. 159 price level, p. 174 Supply shock, p. 192
2. Planned investment spending depends negatively on wages will eventually fall in response to high unemploy-
Autonomous change in aggregate spending, Fiscal policy, p. 176 Stagflation, p. 193
ment and aggregate output will rise. So the long-run
End-of-Section Review and
p. 160 the interest rate and on existing production capacity; it Long -run macroeconomic equilibrium, p. 194
Monetary policy, p. 177
aggregate supply curve is vertical at potential output.
Aggregate supply curve, p. 179
Multiplier, p. 160 depends positively on expected future real GDP. Recessionary gap, p. 195
Problems In addition to the
Consumption function, p. 162 Nominal wage, p. 180 11. In the AD–AS model, the intersection of the short -run
3. Firms hold inventories of goods so that they can satisfy Inflationary gap, p. 196
consumer demand quickly. Inventory investment is
aggregate supply curve and the aggregate demand curve
Problems Autonomous consumer spending, p. 162 Sticky wages, p. 180 Output gap, p. 196 opportunities for review at the end of
Short -run aggregate supply curve, p. 181
Aggregate consumption function, p. 164
positive when firms add to their inventories, negative
Self -correcting, p. 196
every module, each section ends
is the point of short-run macroeconomic equilib-
when they reduce them. Often, however, changes in in- rium. It determines the short-run equilibrium aggre-
1. A fall in the value of the dollar against other currencies makes ner says that this represents a movement down the aggregate de- with a brief but complete Summary
gate price level and the level of short-run equilibrium
ventories are not a deliberate decision but the result of
U.S. final goods and services cheaper to foreigners even though mand curve because foreigners are demanding more in response
aggregate output. concepts, a list of key
mistakes in forecasts about sales. The result is un-
the U.S. aggregate price level stays the same. As a result, foreign- to a lower price. You, however, insist that this represents a right- of the key
planned inventory investment, which can be either
ers demand more American aggregate output. Your study part- ward shift of the aggregate demand curve. Who is right? Explain.
12. Economic fluctuations occur because of a shift of the
positive or negative. Actual investment spending is terms, and a comprehensive set of
aggregate demand curve (a demand shock) or the short -
216 section 4 National Income and Price Determination end-of-chapter problems.
Putting it All Together The final
module in the macro part of the
book, Module 45, shows students
how to use what they have learned
to answer comprehensive, “real-
world” questions about the
macroeconomy, like the type they
will see in the free-response section
of the AP exam.
Appendix 14 provides enrichment
modules for greater insight into What you will learn
in this Module:
microeconomics.
Module 45 • How to use macroeconomic
models to conduct policy
analysis
Putting It All Together • How to approach
free-response
macroeconomics questions
Having completed our study of the basic macroeconomic models, we can use them
to analyze scenarios and evaluate policy recommendations. In this module we de-
velop a step-by-step approach to macroeconomic analysis. You can adapt this ap-
proach to problems involving any macroeconomic model, including models of
aggregate demand and supply, production possibilities, money markets, and the
Phillips curve. By the end of this module you will be able to combine mastery of the
principles of macroeconomics with problem solving skills to analyze a new scenario
section 14 on your own.
Module 79: The Economics of Information A Structure for Macroeconomic Analysis
In our study of macroeconomics we have seen questions about the macroeconomy take
Economics by Example: many different forms. No matter what the specific question, most macroeconomic
problems have the following components:
“How Gullible Are We?” Appendix
Module 80: Indifference Curves and 1) A starting point. To analyze any situation, you have to know where to start.
Consumer Choice 2) A pivotal event. This might be a change in the economy or a policy response to the
Economics by Example: initial situation.
“Why Is Cash the Ultimate Gift?” 3) Initial effects of the event. An event will generally have some initial, short-run effects.
4) Secondary and long-run effects of the event. After the short-run effects run their course,
there are typically secondary effects and the economy will move toward its long-
run equilibrium.
For example, you might be asked to consider the following scenario and answer the as-
sociated questions.
Assume the U.S. economy is currently operating at an aggregate output level above potential output.
Draw a correctly labeled graph showing aggregate demand, short-run aggregate supply, long-run aggre-
gate supply, equilibrium output, and the aggregate price level. Now assume that the Federal Reserve
conducts contractionary monetary policy. Identify the open-market operation the Fed would conduct, han
PREFACE xxxi