aggregate demand and aggregate supply model Flashcards
aggregate demand and supply model
explains short-run fluctuations in real gdp and the price level
aggregate demand curve (AD)
the inverse relationship between the price level and the quantity of real GDP demanded
short-run aggregate supply (SRAS)
positive relationship in the short run between the price level and the quantity of real gdp supplied
aggregate demand: the wealth effects
how a change in price level affects consumption
higher price level leads to lower consumption
aggregate demand: the interest-rate effects
how a change in price level affects investment
higher price level leads to lower investment
aggregate demand: the international-trade effect
how change in price level affects net exports
higher price level leads to lower net exports (more imports)
movement along AD
change in price level
shifts in AD (5)
monetary policy (interest rates)
fiscal policy
household and firm expectations
foreign income
exchange rate
recessions and components of AD
consumption: falls and then stays steady
investment: continues to fall
net exports: increased/ less negative
aggregate supply
sum of all goods and services supplied in an economy
long-run aggregate supply (LRAS)
relationship between the price level and the quantity of real gdp supplied
vertical line
why is SRAS upward-sloping and not vertical (2)
fail to predict and slow to adjust
slow to adjust (3)
sticky prices and wages
slow to adjust wages
menu costs
movement along SRAS
change in price level not cause by factors that would affect SRAs
shifts in SRAS
availability of the factors of production
improvements in tech
expectations
supply shock
long-run economic equilibrium
occurs when Ad and SRAS curves intersect at the LRAS level
supply shock
negative: sudden decrease in availability
positive: sudden increase in availability
affects SRAS
stagflation
inflation and falling real gdp
dynamic aggregate demand and supply model
the economy rights itself
demand shock
rise in AD -> increase in PL and GDP
decrease in AD -> decrease in PL and GDP (gdp < full employment gdp)
supply shock
rise in SRAS -> decrease in PL and increase in GDP
decrease in SRAS -> increase in PL and decrease in GDP (stagflation)
main factors causing the recession of 2008
end of housing bubble
financial crisis
rapid increase in oil prices during 2008
