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67 Cards in this Set
- Front
- Back
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What is the Aggregate Demand/Aggregate Supply model?
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A model to understan short-run fluctuations around the Long Run trend.
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What does the Business Cycle show?
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Fluctuations around some"normal" level of economic activity
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What is the Symbol of the natural rate of output and what does it mean?
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Yn
normal level of economic activity |
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Technically what is a recession?
What is a recession generally speaking? |
Technically: 2 or more consecutive quarters of negative rGDP growth
Generally: a slowdown in economic activity |
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what constitutes a depression?
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a severe recession (this can be subjective
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What is the Aggregate Demand Curve?
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a curve showing the quantity of goods and services bought and sold by consumers, the government, firms, and via net exports (NX) at each price level
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What is the Aggregate Supply Curve?
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a curve showing the quantity of good and services produced at each price level
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What are 3 observations that we have made about economic fluctuations? (i.e. the business cycle)
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1. they are unpredictable and irregular
2. most macro variables tend to move together 3. as output falls, unemployment rises |
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What are the 4 steps to using the AD-AS model?
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1. determine which curve it is. (is it AD or AS?)
2. which direction does the curve shift? 3. use the diagram to describe or compare the initial equilibrium vs. the outcome after 4. keep track of the short run to long run transitions |
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What shifts the Loong Run Aggregate supply curve?
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1. Technology (A)
2. Population/workers (L) 3. Capital (K) 4. Natural resources stock (N) 5. Human capital Stock (H) OR.... Y= f A (KLNH) |
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What shifts the Short Run Aggregate Supply Curve? (SRAS)
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1. anything that shifts the LRAS
2. cost of production 3. P^e (expectations of the general price level, P) |
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What is the wealth affect?
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if general price level falls, the purchasing power of money increases (P goes down => 1/P goes up)
This creates incentive for greater consumption |
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What does it mean if the LRAS curve is vertical?
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it assumes the classical Dichotomy holds in the Long Run
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Why are wages stickier than prices?
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most wages are set based on year to year contracts. prices fluctuate more freely
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What is real wage defined as?
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W
---- P W is the nominal wage P is the General Price level |
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What is the wealth effect and how does it affect the AD curve?
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As the general price level goes down, the value of the dollar goes up. This creates incentive for greater consumption. because consumption (C) affects the AD curve the wealth effect affects the AD curve.
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What are the shifters of the Aggregate demand curve?
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Consumption
Investments Government spending Net Exports (C,I,G,NX) |
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Why is the aggregate supply curve vertical in the long run?
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in the long run the general price level has no effect on the natural rate of output (Yn)
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what does the short run Aggregate supply curve slope upward?
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the SRAS slopes up because of the sticky wage theory, the sticky-price theory and the misperceptions theory
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What is the sticky wage theory and why is it so?
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wages are stickier than prices
this is because wages dont have the flexability that other prices (wage is just the price of labour) because most wages are set by year to yeah contracts |
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if prices change how does the output of the SRAS curve respond?
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a decrease in the price level reduces the quantity of goods and services supplied in the short run
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what is the sticky price theory?
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some prices may be slow to change
if the general price level falls and a firm doesn't respond appropriately, then its relative price is higher than before and sales (i.e. output) may fall |
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what is the natural rate of unemployment?
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the rate of unemployment that, if no changes were occuring in the business cycle, would naturally occur
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what causes the SRAS curve to shift?
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1. anything that shifts the LRAS
2. expectations of the price level |
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what is the misperceptions theory?
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changes in the overall price level can be misleading
because of this producers may think it is only an increase in the price within their market (not economy wide) this leads to output responding to price changes |
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Why are expectations of the price level shifters of the SRAS curve?
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an increase in price expectations (P^e) decrease SRAS (left)
this is due in part by : A) nominal wages adjusting B) price adjustment C) perceptions adjusting |
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Draw a picture of the AD/AS model and show mel
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good
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Where does equilibrium occur on the AD/AS model in the long run?
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Equilibrium occurs at the intersection of all three curves. When the LRAS=SRAS=AD
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Where does equilibrium occur on the AD/AS model in the short run?
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equilibrium occurs where the SRAS curve and the AD curve meet. (SRAS=AD)
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when can an equilibrium different from that of the LR occur on the AD/AS model?
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During recessions and expansions the SRAS and the AD curve may shift from the LRAS curve. This causes a short run equilibrium different from that of the LR
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What is an expansionary gap and where is it in relation to the LRAS curve?
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a gap that occurs between the LRAS curve and the SR equilibrium (SRAS=AD) during an expansion period in the exconomy. The SR equilibrium is located to the right of the LRAS curve, the space between the LRAS and the SR equilibrium is known as the expansionary gap (the space between Yn and Yt)
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what happens to prices during an expansionary gap?
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SRAS will shift left in order to acheive LR equilibrium (LRAS=SRAS=AD)
This left shift of the SRAS curve causes a rise in the general price level |
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Why is the AD curve downward sloping?
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The wealth affect, the interest rate effect, the exchange rate effect
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What is the interest rate effect?
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A lower price level decreases the interest rate which causes consumption to go up
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What is the exchange rate effect?
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when US price level falls, US interest rate falls causing an increase in consumption
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Define the Phillips curve
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Tells you the trade off between unemployment and inflation
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How does the Philips curve relate to AD/AS
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Yn is on the AD/AS model and unemployment is the Philips curve
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What shifts the Philips curve?
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Shifts in the SRAS curve shifts the Philips curve
Shifts in AD cause movements along curve |
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Define the multiplier effect
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When the government injects money into the economy it gives an initial boost to the AD and once one person spends the money it becomes income for another person, this multiplies the original amount of money injected into the economy.
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What is the marginal propensity to consume?
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The percent of a countries income that is spent rather then saved (US spends 90% of income)
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What are the 3 monetary policies?
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Open market trades
Discount rate Reserve requirement |
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How does the Fed lower interest rates?
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They target the rate that the banks charge other banks for loans (Fed Funds Rate), the other interested rates increase or decrease with this interest rate
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What is the definition of GDP?
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“the market value of all final goods and services produced within a country within a given period of time”
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Is GDP a good measure of a countries economic well being?
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no
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What is the difference between Real GDP (rGDP) and Nominal GDP (NGDP)?
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rGDP is calculated at fixed prices while NGDP is calculated at current prices
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How do you calculate the GDP Deflator?
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GDPDef=(NGDP*rGDP)*100
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Who performs fiscal policy?
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Government
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What are the 2 fiscal policies?
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Taxes (increase or decrease)
Government spending |
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What is a recessionary gap and what happens to prices during a recessionary gap?
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A gap when the SR equilibrium is to the left of the LR equilibrium. Prices fall during a recessionary gap
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What type of gap are we in currently?
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recessionary
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Suppose the Fed announces to lower interest rates, what does this do to the money supply?
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the money supply increases
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What is the Theory of Liquidity preference and who wrote it? What's his famous saying about the long run?
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-A theory that the interest rate adjusts to bring money supply and money demand into balance
Keynes- famous for saying "In the LR we're all dead" |
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In the market for money why is the supply curve vertical?
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Money suypply in the SR is fixed by the Fed and perfectly inelastic
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What is the opportunity cost of holding money?
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the interest rate that could be earned elsewhere
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What is the case for active stabilization policy?
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1. The government should avoid being a cause of economic fluctuations
2. The government should respond to changes in the private economy to stabilize AD |
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What's the case against an active stabilization policy?
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1. Long lags make the timing of policy difficult
-Monetary policy is beleived to take 6 months and can possibly last for years -Fiscal policy lags because of the political process 2. Accurate Prediction is necessary to overcome the time lags but accurate prediction is extremely difficult |
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What is the sacrifice ratio?
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the number of percentage points of annual output that is lost in the process of reducing inflation by one percentage point
-an estimate of the sacrifice ratio is 5 (for ever 1% drop in inflation we experience 5% drop in annual output |
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What is the first principle of Economics?
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people face trade-offs
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what is the 2nd principle of economics?
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the cost of soemthing is what you give up to get it
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3rd principle?
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rational people think at the margin
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4th principle?
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people respond to incentives
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5th principle?
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trade can make everyone better off
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6th principle?
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Markets are usually a good way to organize economic activity
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7th principle?
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governments can sometimes improve markter outcomes
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8th principle?
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in the Long run, a countries standard of living depends on it's ability to produce goods and services
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9th principle?
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Prices rise when the government prints too much money
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10th principle?
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Society faces a short-run trade-off between inflation and unemployment
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