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32 Cards in this Set
- Front
- Back
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Aggregate supply |
Relationship between quantity of real GDP supplied and price level |
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Quantity of real GDP supplied |
Total quantity that firms plan to produce during a given period |
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Long run aggregate supply |
Potential GDP is independent of the price level LAS is veritcal at potential GDP |
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Short run aggregate supply |
Increase price level = increased quantity of GDP SAS is upwards sloping |
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Changes in aggregate supply influenced by |
changes in potential GDP changes in money wage rate |
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Changes in potential GDP |
LAS and SAS shift right or left Increases if: Full employment quantity of labour increases Quantity of physical or human capital increases Advance in technology |
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Increase in money wage rate |
SAS shifts leftward and LAS doesn't change |
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Quantity of Real GDP Demanded (Y) = |
C + G + I + x - M |
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Buying plans depend on |
1. Price level 2. Expectations 3. Fiscal policy and monetary policy 4. The world economy |
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Aggregate demand |
Relationship between real GDP demanded and price level |
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Ad Slopes downward because |
Wealth effect Substitution effect |
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Wealth effect |
Rise in price level decreases quantity of real wealth and GDP Demand Increase saving and decrease spending to restore real wealth |
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Intertemporal Substitution effect |
Rise in price level decreases real value of money and raises interest, GDP increases decreases Fall in price level increases real value of money and lowers interest rate, GDP demanded increases |
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International Substitution effect |
Price level increases, price of domestic goods increase, imports increase, exports decrease, decrease in GDP demand Fall in price level, increase in GDP |
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Influences on aggregate demand |
Expectations Fiscal policy and monetary policy World economy |
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Expectations |
Increase in expected future income (+) Rise in expected inflation, goods are cheaper today (+) Increase in expected future profit (+) |
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Fiscal policy |
government's attempt to influence economy by setting and changing taxes, making transfer payments, purchasing goods and services |
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Monetary policy |
Changes in interest rates and the quantity of money in the economy Increase in quantity of money or cut in interest rate increases aggregate demand |
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World economy influences aggregate demand through |
Exchange rate - fall in exchange rate - increases aggregate demand Foreign income - increase causes an increase in aggregate demand |
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Short run macroeconomic equilibrium |
quantity of real GDP demanded = supplied intersects with AD and SAS curve |
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Short run equilibrium |
Real GDP can be greater than or less that potential GDP. Firms increase or decrease production and prices to get back to equilibrium |
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Long run equilibrium |
Real GDP equals potential GDP intersects with AD and LAS Money wage falls/ rises to drop/raise SAS to equilibrium |
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Business cycle occurs because |
aggregate demand and supply fluctuate but money wage does not change quick enough to keep potential and real gdp equal |
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Above full employment equilibrium Full employment equilibrium Bellow full employment equilibrium |
Real GDP> potential GDP Real GDP = Potential GDP Real GDP< Potential GDP |
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Inflationary gap Recessionary Gap |
amount by which potential GDP exceeds real GDP amount by which real gdp is less than potential gdp |
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Rise in price of oil |
SAS shift left GDP decreases Price level rises Stagflation |
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Shools of thought |
Classical Keynesian Monetarist |
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Classical |
Economy is self regulating and full employment Founding school of economics |
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New classical |
Business cycle fluctuations are efficient responses of a well functioning market economy Government should keep taxes low Technology causes many fluctuations |
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Keynesian |
Left alone the economy would not operate at full employment Help from fiscal and monetary policy are required John Keynes Expectations cause fluctuations |
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New keynesian view |
money wage rate AND prices of goods are sticky Monetary and fiscal policy are the only change at full employment and recovery from recession |
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Monetarist |
Economy is self regulating, full employment if monetary policy is not erratic and money growth is steady karl brunner monetary policy mistakes cause fluctuations Money wage rates are sticky Government involvement should be low tax |
