Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

7 Cards in this Set

  • Front
  • Back

Why is the aggregate demand curve downward sloping?

1. Wealth effect

2. Interest rate effect

3. International trade effect

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)

What shifts LRAS?

1. Changes in tech

2. Changes in number of workers

3. Changes in capital stock

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

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

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

Describe automatic adjustment that occurs after an expansion

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