Aggregate Demand & Aggregate Supply Flashcards
income effect
as the price level changes the real value of households income or wealth is affected
(as price level increases your purchasing power decreases)
interest rate effect
a rise in price level increases interest rates (the costs of borrowing), which has a negative impact on investment and consumption spending
international or open economy effect
a rise in domestic price level will mean that consumers and firms increase their importing and net exports fall
AS curve
shows the level of real domestic output that will be produced by firms at each price level
SRAS
a rise in input prices (labor and capital) will raise production costs leading to a price level rise
LRAS
shows the potential level of real GDP when all resources are fully employed
does not change as price level changes
determined by size of the economy’s work force, quantity of capital and state of technology
LRAS will increase over time as technology and productivity increases
factors that increase LRAS/SRAS
economic growth
population growth
labor force growth
capital stock
expansionary gap
when the equilibrium point is above potential
contractionary gap
when the equilibrium point is below potential
characteristics of a contractionary gap
lower rates of inflation higher levels of cyclical unemployment lower company profits fall in labor force participation slower growth of consumer expenditure reduction of sales (on durables) increased need for social security lower interest rates decreased CAB
characteristics of a expansionary gap
wage inflation is there is a tight labor market
lower levels of cyclical UE
increased participation rate
increased government profits and business confidence
increased consumer confidence and sale of durables
reduced need for government welfare
CAB will fall in I increased relive to S
