Reading...
Play button
Play button
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;
29 Cards in this Set
- Front
- Back
|
Aggregate Supply
|
The total of all planned production for the economy
|
|
|
Long-Run Aggregate Supply Curve (LRAS)
|
A vertical line representing the real output of goods and services after full adjustment has occurred
It represents the real GDP of the economy under conditions of full employment; the economy is on its production possibilities curve |
|
|
LRAS is vertical
|
Input prices fully adjust to changes in output prices
Suppliers have no incentive to increase output Unemployment is at the natural rate Determined by endowments and technology (or existing resources) |
|
|
Base-year dollars
|
The value of a current sum expressed in terms of prices in a base year
|
|
|
Endowments
|
The various resources in an economy, including both physical resources and such resources as ingenuity and management skills
|
|
|
Growth is shown by outward shifts of either the production possibilities curve or the LRAS curve caused by
|
- Growth of population and the labor-force participation rate
- Capital accumulation - Improvements in technology |
|
|
Aggregate Demand
|
The total of all planned expenditures in the entire economy
|
|
|
What happens when the price level rises?
|
The real-balance effect (or wealth effect)
The interest rate effect The open economy effect |
|
|
What happens when the price level falls?
|
The greater the total planned spending
|
|
|
The Real-Balance Effect
|
The change in expenditures resulting from a change in the real value of money balances when the price changes, all other things held constant; also called the wealth effect.
|
|
|
The Interest Rate Effect
|
Higher price levels indirectly increase the interest rate, which in turn causes a reduction in borrowing and spending.
One of the reasons that the aggregate demand curve slopes downward |
|
|
The Open Economy Effect
|
Higher price levels result in foreigners’ desiring to buy fewer American-made goods while Americans desire more foreign-made goods (i.e., net exports fall).
Equivalent to a reduction in the amount of real goods and services purchased in the U.S |
|
|
Aggregate Demand versus Demand for a Single Good
|
When the aggregate demand curve is derived, we are looking at the entire circular flow of income and product.
When a demand curve is derived, we are looking at a single product in one market only. |
|
|
Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the _____.
|
right.
|
|
|
Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the ____.
|
left
|
|
|
Table 10-1 Determinants of Aggregate Demand
|
FTIMES
- Increase in the amount of money - Increased job security - Increased economic conditions in other countries. - Reduction of real interest rates - Tax decreases - Drop in foreign exchange value of the dollar |
|
|
For the economy as a whole, long-run equilibrium occurs at the price level where the ...
|
aggregate demand curve (AD) crosses the long-run aggregate supply curve (LRAS).
|
|
|
Long-Run Equilibrium:
The effects of economic growth on the price level |
Economic growth and secular deflation
|
|
|
Secular Deflation
|
A persistent decline in prices resulting from economic growth in the presence of stable aggregate demand
|
|
|
An increase in LRAS will, ceteris paribus, result in a ____ in the price level.
|
decrease
|
|
|
If the AD curve shifts outward by the same amount as the LRAS curve, the price level ...
|
remains constant.
|
|
|
Supply-Side Inflation
|
Figure 10-8 panel a shows a rise in price level caused by a decline in long-run aggregate supply.
A leftward shift could be caused by several factors: Reductions in labor force participation Higher marginal tax rates on wages |
|
|
Demand-Side Inflation
|
If aggregate demand increases for a given level of long-run aggregate supply, the price level must increase.
|
|
|
Long-run aggregate supply
|
The long-run aggregate supply curve is vertical at the level of real GDP that firms plan to produce when they have full information and when input prices have adjusted to any change in output prices.
|
|
|
Economic growth
|
Shown by an outward shift of the LRAS curve or of the production possibilities curve
|
|
|
Why the aggregate demand curve slopes downward and factors that cause it to shift
|
Slopes downward due to the real-balance effect, the interest rate effect, and the open economy effect
May shift due to a number of factors |
|
|
Long-run equilibrium for the economy
|
Occurs when the price level adjusts until total planned real expenditures equal actual real GDP
|
|
|
Why economic growth can cause deflation
|
If AD is stationary during a period of economic growth, the LRAS curve shifts rightward along the AD curve and the equilibrium price level falls.
|
|
|
Likely reasons for persistent inflation
|
One event that causes inflation is a decline in LRAS; another occurs in a growing economy when AD growth exceeds the increase in LRAS.
|
