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74 Cards in this Set
- Front
- Back
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We can use the AD-AS model to analyze fluctuations in both... |
output and the inflation rate |
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The AD-AS model applies to... |
both the short run and the long run |
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The _______ ____ __ is on the vertical axis and the ______ ______ __ ______ is on the horizontal axis. |
current inflation rate current level of output |
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The aggregate demand curve shows the relationship between... |
planned spending and the inflation rate |
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The aggregate supply curve shows the relationship between... |
the amount of output the firms want to produce and the inflation rate. |
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The inflation rate in a long-run equilibrium is called the... |
expected inflation rate. |
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The expected inflation rate is the rate that consumers businesses and governmentt believe will... |
prevail in the long run. |
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Shifts in either the AD curve of AS curve can... |
push the economy out of long-run equilibrium |
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Changes in aggregate demand and aggregate supply can move the economy from.... |
a short-run equilibrium toward a long-run equilibrium |
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As the inflation rate rises, the... |
quantity of planned spending and output demanded falls, holding other factors constant. |
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The AD curve slopes downward because, holding all else constant... |
an increase in the inflation rate causes planned consumption, investment, and net exports to fall, resulting in decreased levels of planned spending and short-run output |
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PAE = |
C + Ip + G + Nx |
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When inflation rises, the Federal Reserve... |
increases the real interest rate, and a higher real interest rate causes consumption, investment, and net exports to fall. |
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One of the primary responsibilities of the Fed is.. |
to maintain a low and stable rate of inflation |
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Decrease in consumption and investment reduce... |
planned aggregate expenditure PAE and, through the multiplier, this leads to a decrease in equilibrium output |
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When a recessionary gap opens... |
inflation falls. |
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The Federal Reserve reacts to a fall in inflation by... |
decreasing the real interest rate, causing consumption, investment, and equilibrium output to rise. |
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If nominal inflation goes up... |
the output goes down. |
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If nominal inflation goes down... |
the output goes up. |
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An increase in aggregate demand is a... |
rightward shift in the AD curve |
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A decrease in aggregate demand is a... |
leftward shift of the AD curve |
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Planned spending is affected by changes in... |
output, and the inflation rate. |
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Changes in consumer confidence and consumer's real wealth affect consumption spending even if... |
there has been no change in output or the inflation rate |
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Decreased business confidence or new technological opportunities may lead firms to... |
decrease or increase their planned investment. |
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Changes in willingness of foreigners to purchase domestic goods or of domestic residents to purchase foreign goods will... |
affect the planned level of net exports. |
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Demand shocks affect short-run output and therefore... |
increase or decrease aggregate demand. |
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A positive demand shock because the AD shifts to the... |
right as a result of the shock. |
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A negative demand shock shifts the AD curve to the... |
left. |
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Stabilization policies are government policies used to affect planned aggregate expenditure with the... |
objective of eliminating output gaps. |
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The two major tools of stabilization policy are... |
fiscal policy and monetary policy |
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Stabilization policy, changes in fiscal policy and monetary policy... |
affects aggregate demand and shifts the AD curve |
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Suppose that the government reduces it's spending in order to decrease the budget deficit. This will cause spending to... |
decrease at any given inflation rate and shift the AD curve to the left. |
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Increases in government spending shift... |
the AD curve to the right. |
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Changes in taxes also... |
shift the AD curve. |
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Suppose that the government cuts taxes. This raises households' disposable income, leading them to... |
increase their consumption spending, which causes an increase in planned spending and real GDP |
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What happens with a tax increase? |
Disposable income falls, consumption and output fall, and the AD curve shifts to the left. |
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Two reasons why the Fed might change the real interest rate when inflation is stable |
The Fed may decide to change its current target for the inflation rate It is concerned about the level of output itself relative to potential |
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A reduction in the Fed's inflation target will.. |
shift the AD curve to the left.
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The Fed can now stimulate spending by... |
decreasing the real interest rate. |
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An increase in the Fed's inflation target will... |
shift the AD curve to the right. |
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If the government wants to increase aggregate demand, there are three tools it can employ
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increase government spending cut taxes decrease the real interest rate |
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If the government wants to decrease aggregate demand, it also has three options |
decrease government spending raise taxes increase the real interest rate |
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The aggregate demand curve shows...
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the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate. |
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The AD curve slopes downward because of the Fed's monetary policy rule: |
Higher inflation leads the Fed to raise the real interest rate, which reduces spending and thus short-run equilibrium output |
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Demand shocks... |
shift the AD curve. |
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Positive demand shocks shift...
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the demand curve to the right. |
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Positive demand shocks shift.. |
the AD curve to the left. |
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Stabilization policy... |
shifts the AD curve |
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Three things that increase aggregate demand |
higher levels of government spending lower taxes lower interest rates |
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Three things that decrease aggregate demand |
decreased government spending higher taxes higher interest rates |
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When the inflation rate rises... |
the level of planned aggregate expenditure and short-run output falls. |
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When the inflation rate falls... |
planned spending and output rise. |
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Menu costs refer to... |
the fact that firms must incur costs in order to change their prices. |
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Two important reasons why the relationship between output and the inflation rate exists: |
inflation inertia and the output gaps |
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Inflation tends to remain roughly constant as long as... |
the economy is at potential output and there are no external shocks to the price level. |
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Two closely related factors that play an important role in determining the inflation rate: |
the behavior of the public's inflation expectations and the existence of long-term wage and price contracts. |
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In negotiating future wage and prices, both buyers and sellers take into account... |
the rate of inflation they expect to prevail in the next few years. |
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What helps determine the future inflation rate?
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today's expectations of future inflation rate |
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The higher the expected inflation rate of inflation , the more... |
nominal wages and the cost of other inputs will tend to rise. |
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If wages and other costs of production grow rapidly in response to expected inflation, firms will have to...
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raise their prices rapidly as well in order to cover their costs. |
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A high rate of expected inflation tends to lead to... |
a high rate of actual inflation |
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If expected inflation is low, actual inflation... |
should be low as well. |
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Low inflation leads to... |
low expected inflation, which leads to a slow increase in wages and other production costs, which leads to low inflation... |
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Long-term contracts serve to build in wage and price increases that depend on... |
inflation expectations at the time the contracts were signed. |
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In the absence of external shocks, inflation... |
tends to remain relatively stable over time. |
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Inflation tends to be inertial for two main reasons: |
the behavior of people's expectations of inflation and the existence of long-term wage contracts |
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A low inflation rate leads people to expect low inflation in the future, which results in... |
reduced pressure for wage and price increases and vice versa |
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If actual output equals potential output then... |
there is no output gap |
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If the output gap is zero, the rate of inflation will... |
tend to remain the same |
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Most firms' sales exceed their maximum sustainable production rates |
expansionary gap |
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How will firms respond to an expansionary gap? |
by trying to increase their relative prices. |
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When an expansionary gap exists, the rate of inflation will tend to...
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increase |
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If a recessionary gap exists, firms will have an incentive to... |
cut their relative prices so they can sell more |
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When a recessionary gap exists, the rate of inflation will tend to... |
decrease. |
