AD and AS model Flashcards
what are the three components of the dynamic AD/AS model?
the AD curve
LRAS / solow growth curve
SRAS curve
what is the AD curve?
M + v = P + Y = inflation + real growth
it shows the combinations of inflation and real growth consistent with a given rate of spending growth (M + v)
what will causes shifts in the AD curve
an increase in spending growth(M rises and/or v rises) or decrease in spending growth( M falls and/or v falls)
what is the LRAS curve?
also called the solow growth rate marker
it is the economy’s potential growth rate where prices and real factors of production are flexible
in LRAS how is the potential growth rate determined?
1) increases in the stocks of labor and capital
2) increases in productivity
what is the correlation between inflation and the LRAS?
money is neutral in long run so the solow growth curve would not change when inflation increases or decreases
what causes shifts in the LRAS?
positive or negative productivity shocks
what are some negative productivity shocks?
1)bad weather
2)higher price or oil or other inputs
3)productivity/technology slump
4)higher taxes/regulation
5)disruption like 6)war/earthquake/pandemic
what are some positive productivity shocks?
1) good weather
2) lower price of oil or other input
3) productivity/tech boom
4) lower rtaxes/regulation
4) smooth production with no disruptions
what is the SRAS?
the SRAS shows the positive relationship between the inflation rate and real growth
in the SR, the money is not neutral and prices are not flexible
how does shifts in the AD curve affect the SRAS curve?
in the short run, an increase in AD will increase inflation and real growth
in the short run, a decrease in AD will decrease the inflation rate and the growth rate
what happens in short run if you increase the growth rate of money?
the AD curve shifts to the right
the SRAS curve shifts to the right where the new SRAS intersects the new AD
it moves to another point on the new SRAS and goes back to the original point where the old AD , LRAS and SRAS intersect
what are some positive factors that affect the aggregate demand curve?
faster money growth rate
confidence
increased wealth
lower taxes
greater growth of govt spending
increase export growth
decreased import growth
what are some negative factors that affect the AD curve?
1) slower money growth rate
2) fear
3) higher taxes
3) reduced wealth
4) lower growth rate of govt spending
5) decreased export growth
5t) increased import growth
