Aggregate demand and supply Flashcards
what do aggregate demand and supply models explain?
short-run fluctuations in real GDP and the price level.
explain the aggregate demand curve and the relationship between the price level and GDP
The aggregate demand curve slopes downwards, showing the inverse relationship between the price level, the quantity of real GDP demanded by households, firms and governments, plus net exports
why is there an inverse relationship between the price level and GDP?
- the wealth effect
- the interest rate effect
- the international trade effect
explain the wealth effect
an increase in the price level reduces wealth, which in turn reduced consumption
explain the interest rate effect
an increase in price level increases the need for cash/funds which increases interest rates and decreases consumption
explain the international trade effect
an increase in the price level means exports become more expensive and imports cheaper. Exports therefore fall and imports rise.
what does the aggregate demand curve show?
all combinations of inflation and real growth that are consistent with a rate of spending growth
an increase in nominal GDP will cause the aggregate demand curve to…
shift to the right
decrease in nominal GDP will cause the aggregate demand curve to…
shift to the left
what does the short run aggregate supply curve look like ?
upward sloping (ski jump)
what does the long run aggregate supply curve look like ?
a vertical line
what does the short run aggregate supply curve show ?
the relationship in the short run between the price level and the quantity or real GDP supplied
what does the Long run aggregate supply curve show ?
The long-run aggregate supply curve shows that in the long run, increases in the price level do not affect Real GDP
what are 3 main variables that will shift an aggregate demand or short-run aggregate supply curve
- Changes in government policies
- Changes in the expectations of households and firms. e.g. consumer confidence
increase- Changes in foreign variables e.g. exchange rates
- Changes in the expectations of households and firms. e.g. consumer confidence
what causes the long-run aggregate supply curve to shift ?
because potential GDP increases over time. Increases in potential GDP (or economic growth) are due to
- An increase in resources
- An increase in machinery and equipment
- New technology
what variable Does the LRAS curve represent
potential GDP
what effect will an increase in aggregate demand from a faster growth rate have on the AD curve and the SRAS curve?
the AD curve shifts out and the economy expands along the short run aggregate supply curve
what effects does inflation have on the AD, SRAS & LRAS curves and the equilibrium
As expectations adjust to the inflation rate the SRAS curve will shift up and to the left, the inflation rate increases and the growth rate declines, moving the long-run equilibrium upward
what effects do a positive shock have on the growth rate and inflation rate
a positive shock shifts the LRAS to the right thereby reducing the inflation rate and increasing GDP
what effect will a change in price level have on LRAS?
it does not affect the level of aggregate supply in the long run.
The short-run aggregate supply curve has a ________ slope because as prices of ________ rise, prices of ________ rise more slowly.
positive; final goods and services; inputs
Workers expect the rate of inflation to fall from 4 per cent to 1 per cent next year. As a result, this should:
shift the short run aggregate supply curve to the right
