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7 Cards in this Set
- Front
- Back
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Why is the aggregate demand curve downward sloping? |
1. Wealth effect 2. Interest rate effect 3. International trade effect |
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What variables shift the AD? |
1. Changes in gov policy (changes in i-rates, taxes) 2. Changes in the expectations of households and firms 3. Changes in foreign variables (growth rate of domestic GDP relative to growth rate of foreign GDP, the exchange rate, price level) |
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What shifts LRAS? |
1. Changes in tech 2. Changes in number of workers 3. Changes in capital stock |
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Why is the SRAS curve downward sloping? |
Main reasons: input prices do not change as quickly as output prices. Therefore, as the price level increases supplying more becomes more profitable. 1. Contracts makes wages sticky 2. Firms are often slow to adjust wages 3. Menu costs make some prices sticky |
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Variables that shift the SRAS |
1. Increases in the Labor force and capital stock 2. Technological change 3. Expected changes in future price level 4. Adjustment of workers and firms to errors in past expectation about the PL 5. Unexpected changes in the price of an important natural resource |
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Describe automatic adjustment that occurs after a recession |
1. AD is weak 2. Price level and GDP have both dropped 3. Because the PL is lower, workers will accept lower wages and firms will accept lower prices. 4. SRAS will shift to the right 5. Economy moves back to potential GDP at a lower price level |
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Describe automatic adjustment that occurs after an expansion
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1. AD is above potential GDP 2. The price level is high and employment is high 3. Workers and firms will adjust to the PL being higher than expected. Costs will rise. Workers will push for higher wages because of high PL. 4. SRAS shifts left 5. GDP will be back at potential at a higher price level |
