AD/AS Flashcards
What’s different about the SRAS curve and LRAS curve?
The short run curve slopes upwards whereas the long run is vertical because over time supply isn’t dependent on market forces but on the quan and qual of the factors of production.
Why does the AD curve slope downwards
A fall in the price level causes an increase in quantity demanded through the wealth, interest-rate and exchange-rate effect.
Using the 3 theories explaining the short-run AS curve, explain how he economy recovers from a recession
Sticky wage - wages take a while to catch up and remain too high if the economy is in recession so labour demand is low. Over time, nominal wages are changed so the economy returns to full employment.
Sticky price - prices don’t adjust quickly enough which causes recession, over time firms adjust.
Misperception - the economy is in recession when the price level is below what’s expected. As expectations adjust the economy levels again.
The speed of the recovery from a recession is dependent upon what?
How quickly prices, wages and expectations adjust.
If the central bank increase money supply but people EXPECT it, what happens to AD and AS?
AD shifts RIGHT - this is because money supply has increased
AS shifts LEFT - this is because the public expected it
If the public don’t expect it, the SRAS curve doesn’t shift at all.
If the public expect inflation to increase, what will happen to nominal wages?
They’ll demand higher wages and in turn, firms will reduce their labour demand.
