4.1-4.4 Flashcards
depends on the production function of a country
aggregated output or supply (GDP)
taken together, capital, labour, natural resources constitute a Nation’s-State’s
factor endowment
what are the 3 forms of labour
- productive
- managerial
- entrepreneurial
productive, managerial, and entrepreneurial are embody
personal knowledge
a governing body of an organization regarded collectively
management
the role of management is to make _____ available so that production workers can works tasks and markets can distribute ______
inputs
outputs
most major corporations follow a
hired gun or business entrepreneur
entrepreneur comes from the french words
entre, prendre
involves seeing and realization a vision of future markets, products and opportunities and leads the organization in realizing that vision
entrepreneurial knowledge
is constantly evolving
natural resources
at first glance has no relationship to knowledge, but new knowledge lets us see it in a different light
natural resources
refers to the impact of new knowledge on the production function of a firm/nation
technological change
known as the measure of our economic ignorance
Solow Residual
symbolic equation for production function
Y=f(K,L,T)
what percentage of growth in national income us attributable to changes in quantity and quality of K and L, and what % is attributable to technological change
25%
75%
the economic effect of solow residual was called
creative destruction
in response to technological change, the production can shift up or down because
technology can be found or lost
a new production function can emerge with
innovation and/or elimination
2 supply surves
- short-run aggregate supply (SAS)
2. long-run or potential aggregate supply (LAS)
aggregate expenditure, demand and the SAS abd LAS results in the
Keynesian double cross
is the 45 degree line
Keynesian cross
equilibrium is with respect to both
- current (short run) equilibrium
2. potential (long run) equilibrium
SAS is plotted assuming ______ remain constant
nominal factor prices
if the overall price level rises in the SAS then what happens to real factor prices and production?
- decline
2. increase
why does an increase in price level result in increased production
because revenue goes up while costs remain the same (profit increase)
why is the SAS upward sloping
because as production grows prices rise
higher prices for g/s with lower real factor cost in production _______ profits and encourages firms to _______
increases
supply more
shifts in the SAs can occur due to (2)
- change in any factor costs
2. technological change
SAS is the summation of supply curves all producing _______ in an economy and react the same to _______
- enterprise
- changes in final and factor prices
in the classical model it is assumed money wages and prices are
perfectly felxible
when money wages and prices are perfectly flexible an increase in demand
raises prices rather than expand output
SAS is
inelastic or even vertical
Keynes believed that money wage was not
perfectly flexible but sticky
exhibits forward looking expectations
business
under the Keynesian model sticky wages results in a SAS curve with a
relatively gentle upward slope
in the classical and new classical model, flexible wages and prices result in a very _________ SAS curve
inelastic or even vertical
the difference in the slope of the SAS curve has significant implication for
fiscal and monetary policy
is found when all available factors of production are fully employed
long-run aggregate supply curve
LAS is vertical, so there can be no _______ since factors of production are fully employed
increase in output
LAS corresponds to
potential real GDP
LAS corresponds to potential real GDP , that is the
max output attainable given the existing supply of factors of production
movement up or down the LAS curve is caused by a change in (2)
- aggregate price level for final g/s
2. factor prices
if final prices go up what happens to factor prices
rise at the same rate
if final prices go up, meaning factor prices rise at same right means that these 3 things remain constant
- real wage rate
- other factor prices
- real GDP
LAS shifts right or left if there is an increase or decrease in
available factors of production
the key for movement along SAS is the
labour market
movement up along the SAS curve means real GDP ____ as price level ____ because unemployment _____ as real wage rate ______ with nominal or money wages ______
rises rises falls falls fixed
the natural rate of Ue is
full employment
how is the natural rate of Ue (full employment) achieved
when SAS measured by real GDP attains LAS
the natural rate of Ue does not equal 0 but rather reflects
frictional and structural Ue
if one moves along SAS beyond LAS (potential GDP), factor prices
will increase
while in short run, output may exceed potential but cannot be maintained because
competition for fully employed factors of production raises their cost causing production to drop, shifting SAS to the left
shifts in SAS occurs because of _____, affecting a _____
- changes in real factor prices
- firm’s costs of production
LAS does no shift because with changing factor prices because
factors and inputs are fully employed
shifts in both SAS and LAS are caused by
- changes in quantity of K and L
2. advances in technology
purpose of the AD/AS model is to
understand and predict changes in real GDP and price level
there are both short-run and long-run points of
equilibrium
short-run equilibrium occurs when
SAD=SAS
if final and factor prices tend to be higher than consumers are willing to pay the firms will
cut production, lower prices, and factor prices will tend to fall
to bring SR back to equilibrium when real GDP is higher than equilibrium firms will
cut production, lower prices, and factor prices will tend to fall
if real GDP is is less than equilibrium, prices will
increase until equilibrium is achieved
if SR equilibrium is less than potential real GDP or full employment there is a
recessionary gap
if SR equilibrium is more than potential real GDP or full employment there is an
inflationary gap
in a recession factor prices are depressed causing cost of production to ____ and output to _____
fall
increase
during inflation factor prices are ____ causing the cost of production to _____ and output to _____
elevated
rise
fall
shifts in _____ are measured by the growth rate of potential GDP
LAS
results when the rate of growth of aggregate demand is greater than long-run aggregate demand
inflation
a major factor affecting the rate of growth of AD is the
quantity of money
if the money supply grows faster then LAS what occurs
inflation
if the money supply grows slowly, inflation
grows slowly
if world economy grows faster than the domestic economy, demand for exports
increases
if the world economy grows faster than the domestic economy this shifts the domestic economy
out of equilibrium with LAS
If SAS curve shifts to the left out of equilibrium with potential GDP, what is created
a recessionary gap but at a higher price level
a recessionary gap but at a higher price level is a combination of
recession and inflation
the combination of recession and inflation is called
stagflation
the economy can be in 3 possible states
- recessionary gap
- full employment
- inflationary gap
will tend to eliminate inflationary gap and restore full employment
automatic forces
there are no automatic forces that will eliminate a
recessionary gap
