AD-AS Flashcards
what does AD stand for?
aggregate demand
what does AS stand for?
aggregate supply
what is the AD-AS model used to forecast?
output and the average price level
what does AD-AS describe?
the forces that determine aggregate outcomes such as total output and avg. prices across the economy as a whole
what does the aggregate demand curve show?
the relationship between the price level and the total quantity of output that buyers collectively plan to purchase
what was does the AD curve slope?
downwards sloping
what does the aggregate supply curve show?
the relationship between the price level and the total quantity of output that suppliers collectively produce
what way does the AS curve slope?
upwards sloping
what is macroeconomic equilibrium?
occurs when the quantity of output that buyers collectively want to purchase is equal to the quantity that suppliers collectively want to produce
what does macroeconomic eqm determine?
the level of equilibrium GDP
how are the AD-AS framework different from the microeconomic supply and demand framework?
they focus on a different set of trade offs and macroeconomic forces
in macro, the key trade offs are across time
what is aggregate expenditure?
the total amount of goods and services that people want to buy across the country
what is the formula for AE?
AE = C + I + G + NX
why is the AD curve downwards sloping?
as price level increases, inflation increases, and the real interest rate increases, therefore AD decreases because the opp cost of spending increased
what are the other economic forces that lead AD to be downwards sloping?
- international trade effect (relatively small) -> increase in price = decrease in NX = decrease in AE
- wealth effect -> increase in price = decrease in real wealth = increase in consumption = decrease in AE
- debt effect -> increase in price = decrease in real value of nominal debt = consumption increases
how does a change in price affect the AD curve?
movement along the AD curve
higher price = move up
lower price = move down
how does changes in spending affect the AD curve?
shift the AD curve
increase in AE = shift right
decrease in AE = shift left
what are the AD shifters?
- consumption
- investment
- gov. expenditures
- net exports
why is the AS curve upward sloping?
a higher average price level results in a greater quantity of output supplied
how does price affect the AS curve?
movement along the curve
price increase = move up
price decrease = move down
how does change in production cost shift the AS curve?
shift the curve
increase in AE = shift right
decrease in AE = shift left
what are the 3 AS shifters? how do they shift / move the AS curve?
- input prices - increase p = left; decrease p = right
- productivity - decrease productivity = left; increase productivity = right
- exchange rate - depreciate = left; appreciate = right
what is monetary policy?
the process of setting interest rates in an effort to influence economic conditions
what are the two types of monetary policies?
1) inflation-induced: when bank is worried that inflation is too low, it responds by cutting real interest rate
2) output-induced: the bank cut real interest rate in an attempt to combat the decrease in GDP
how does inflation-induced response affect the AD curve?
an inflation-induced change in interest rates does not shift the AD curve
how does output-induced response affect the AD curve?
- an output induced change in interest rates changes the real interest rate at the prevailing price level
- shift the AD curve
what is classified as expansionary?
decrease in real interest rate
how does the AD respond with an expansionary policy?
the AD curve shifts right
what is a fiscal policy?
the government’s use of spending and tax policies to influence economic conditions
what is the multiplier?
the multiplier is a measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending
how do you forecast macroeconomic outcomes?
- determine if there is a shift in AD or AS
- determine if the shift is an increase or a decrease
- determine the change in price level and output in the new equilibrium
what change does a change in the avg. real price level have in the long run?
in the long run, a change in the avg. price level has no effect on real variables
what does the long-run AS curve look like?
vertical
how does AD affect long-run output?
AD is irrelevant to long-run output
what is the very-short run AS curve?
the AS curve that applies to the very short run, in which no prices have changed
how does the very-short run AS curve look?
looks horizontal because prices are effectively fixed
what is a sticky price?
prices that adjust sporadically and sluggishly to changes in market conditions
they explain why the short-run is upward slopping
what is a short-run AS curve?
the AS curve that applies over a period when prices are neither fully fixed nor fully flexible
upwards sloping
what is the medium-run AS curve?
a period in which firms have time to adjust to an output gap
what is the difference between medium-run AS curve and short-run AS curve?
the medium-run curve is steeper than the short-run AS curve
