Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
26 Cards in this Set
- Front
- Back
|
Define: aggregate demand curve |
The relationship between the price level and quantity of real GDP demanded by households, firms and the government |
|
|
Define: short-run aggregate supply curve |
The short-run relationship between the price level and the quantity supplied by firms. |
|
|
Define: household wealth and the wealth effect. |
Household Wealth: the difference between a household's assets and its debts. Wealth Effect: the effects of the price level has on consumption via the household wealth. I.e. as price level increases, consumption falls through the lower household wealth affected by inflation. |
|
|
Define: interest-rate effect |
Price levels change the money demanded, which determines interest rates. The higher it is, the higher the cost of borrowing. |
|
|
Define: international trade-effect |
As inflation occurs, the price level of domestic products become more expensive causing net exports to decrease. |
|
|
What are three reasons for the aggregate demand having a downward slope? |
1. Household Effect 2. Interest-rate Effect 3. International trade-effect |
|
|
What will cause a shift in the aggregate demand? What won't? What are those three variables? |
Changes in variables other than price. If prices change, holding all other variables constant, it will only cause a movement along the curve. 1. Changes in government policies 2. Changes in the expectation of firms and households 3. Changes in foreign variables |
|
|
Define: monetary and fiscal policy. What are they used for? |
Monetary Policy: actions by the central bank to manage the money supply and the interest rate Fiscal Policy: changes in federal taxes and purchases to achieve macroeconomic policy objectives To shift the aggregate demand curve |
|
|
What is the effect of expectations of incomes of households and firms have on the aggregate demand? |
A shift relative to the 'emotional' expectation of future income |
|
|
Explain: changes in the price level does not affect the level of real GDP (long-run aggregate supply). Hence, what causes a shift in the long-run aggregate supply? |
As the long-run real GDP is the normal capacity to produce, which is not affected by price level changes, real GDP is unaffected. Shift: changes in labor force, capital stock and technology |
|
|
Why is the short-run aggregate supply upward sloping? 2 reasons. |
Profits increase as the price level of inputs rise more slowly than final products; thereby increasing the willingness of firms to supply more. This can also be true when firms don't change prices relative to other substitutes. Thus, sales increase. |
|
|
What are the three most common explanations for the inaccurate predictions of the price level causing the short-run aggregate supply to be upward sloping? |
1. Sticky wages: by contract, prices of inputs remain constant, regardless of changes in the price level. 2. Slow to adjust: despite contracts, firms are still slow to adjust wages, creating losses or profits. 3. Menu costs: costs to change "menu costs" will prevent firms from changing costs; thereby fixing their price relative to substitutes. Hence, profits can increase. |
|
|
What are five important variables affecting the aggregate supply curve to shift? |
1. Increases in labor force and capital stock 2. Technological changes 3. Expected price level 4. Adjustments to expectations 5. Supply shocks |
|
|
If prices are expected to increase by a certain amount, how much will the SRAS shift by? Why it so? |
By the same amount because firms will adjust wages to preserve the purchasing power. |
|
|
Define: supply shock. |
Unexpected events (e.g. input price rise) causing the short-run aggregate supply curve to shift. |
|
|
Explain: adjustments in previous errors in predictions of the price-level will shift the short-run aggregate supply. |
As firms adjust to correct previous predictions, they will need a different price to sustain the same purchasing power, thus the same level of real GDP. |
|
|
In the context of the ADAS model, when can the economy operate at potential GDP? |
When the macroeconomic equilibrium occurs at a point along the long-run aggregate supply curve. |
|
|
Define: automatic mechanism (ADAS). |
The process of the adjustment back of the macroeconomic equilibrium to the potential GDP without any actions taken by the government. |
|
|
Explain: what is a way a recession will revert back to potential GDP? |
Due to deflation in a recession, wages will decrease as workers are more accepting of lower pay. This causes firms to supply more because of lower prices of inputs. |
|
|
In the long-run, what is the end effect of a n increase in the aggregate demand?
|
A change in price level. A shift to the left will cause deflation and vice versa. |
|
|
Define: stagflation. What can cause it? |
A combination of a recession and inflation. This can be caused by supply shocks causing the short-run aggregate supply to shift to the left. |
|
|
According to to the ADAS model, what is the cause of most inflation? |
When spending (AD) is growing faster than production (AS). |
|
|
If the exchange rate rises, what does it imply regarding currency strength and the aggregate demand? |
The local currency is stronger relative to others. This causes imports to increase as a result of cheaper prices, which shifts AD to the left from lower net exports. |
|
|
In general, what is the most common cause for a shift in aggregate supply? Why? |
The expected inflation rate and adjustments back to it to preserve purchasing power. This is because the aggregate supply is determined by the prices of inputs (i.e. wages). |
|
|
If there is a supply shock, what will happen that causes demand and supply to revert back to equilibrium? |
As unemployment increases, workers will be willing to accept lower nominal wages and firms are willing to accept lower prices. Hence, SRAS shifts to the right. |
|
|
If actual output is less than potential and the price level is higher than previous equilibrium, what does it imply regarding the SRAS and SRAD? What if it were lower? |
SRAS decreased while SRAD increased. SRAD decreased while SRAS increased. Use graph. |
