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18 Cards in this Set
- Front
- Back
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AD curve shifts right |
increase in money supply decrease in exogenous money demand increase in government purchases decrease in taxes increase in exogenous consumption increase in exogenous investment |
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AS curve shifts right |
increase in natural rate of output decrease in expected price |
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ASAD and ISLM graphs compare the intiaul medium run to the new medium run due to an increase in the money supply |
both the interest rate and output level are the same, there is no change in the composition of spending between C, I and G |
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Long run effect of an increase in the government budget defecit |
There will be less capital, and less capital implies lower labor productivity |
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Labor Market Graph |
wage setting curve (negative slope) price setting curve (horizontal)
y= Q of W/P x= Q of u |
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Labor Market Graph - what happens when there is a decrease in employee bargaining power due to employees facing competition from outsourcing? |
WS curve shifts down |
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Labor Market Graph - there is an increase in the mark-up or a decrease in the labor productivity |
PS curve shifts down |
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Why does the IS curve have a negative slope? (flow diagram) |
nominal interest rate goes down -> quantity of investment spending goes up -> demand goes up -> firms production goes up -> income goes up -> consumption and investment go up (feeds back to demand) |
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IS curve shifts to the right |
increase in government spending decrease in taxes increase in exogenous consumption increase in exogenous investment |
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Why does the LM curve have a positive slope? (flow diagram) |
real GDP -> increase in quantity of real money supply -> excess demand for money -> people sell bonds -> bond prices fall -> nominal interest rates fall |
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What shifts the LM curve to the right? |
increase in money supply decrease in price decrease in exogenous money demand |
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Why would you not be willing to hold a bond which earned a negative nominal interest rate? |
Because you can always hold your financial wealth in the form of money and earn a zero nominal interest rate. |
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What happens to the money demand curve when the nominal interest rate equals zero? |
The money demand curve goes from being negatively sloped for i>0 to horizontal and i=0 |
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The Liquidity Trap |
Once nominal interest rates hit zero the LM becomes flat, this flat part of the LM is called the liquidity trap |
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ISLM Graph |
LM has a positive slope IS has a negative slope
y = Q of Y x = Q of i |
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ASAD Graph |
AS has a positive slope AD has a negative slope
y = Q of Y x = Q of P |
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Flow Diagrams IMR to SR |
Y falls because: demand - firms - income - consumption/investment
P falls because: Y - u - W - P
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Flow Diagram NMR to SR |
Wage Price Spiral P<Pe - Pe decreases - W decreases - firms produce less (back to Pe decreases) |
