aggregate demand and supply and how monetary and fiscal policy can influence them Flashcards
what is the wealth effect
An increase in the price level reduces wealth (especially cash), which, in turn, reduces consumption.
whhat is the interest rate effect
An increase in price level increases the need for cash/funds, which increases interest rates and decreases.
what is the international trade effect
An increase in the price level (relative to trading partners) means exports become more expensive and imports cheaper. Exports, therefore, fall and imports rise
The aggregate demand (AD) curve slopes _________, showing the _______
downwards
inverse relationship between the price level, the quantity of real GDP demanded by households, firms and the government, plus net exports
The aggregate supply (SRAS) curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied.
The short-run supply curve shows a direct relationship between ________ while the long-run aggregate supply curve shows that, in the long run, _____________
a direct relationship between price levels and the real GDP
increases in the price level do not affect the level of real GDP
The long-run aggregate supply curve, however, will 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.
During the __________ phase of the business cycle, production, employment and income are increasing at a rate that is above the trend rate in growth that the economy experiences over time
expansion
The period of expansion ends with a
business cycle peak
Following the business cycle peak, production, employment and income are growing at a rate that is below trend as the economy enters the __________ phase of the cycle.
contraction
The contraction phase may be followed by a _________, which occurs when total production and employment are decreasing and the rate of economic growth is negative
recession
The contraction or recession comes to an end with a business cycle ________, after which another period of expansion begins.
trough
As the economy nears the end of an expansion, interest rates are usually _____and the wages of workers are usually rising faster than _____. As a result of rising interest rates and rising wages, the profits of firms ________. Typically, towards the end of an expansion, both households and firms will have substantially ______
rising
prices
fall
increased their debts.
An economic contraction will often begin with a decline in ______ As spending declines, firms selling capital goods and consumer durables will find their sales ________. As sales _____ firms begin to ____________. ____________ and fallling profits leads to __________ as such a _____ may occur
spending by firms on capital goods or by households on new houses and consumer durables
falling
fall
lay off workers or reduce hours of work
rising unemployment
further declines in spending
recession
As the contraction or recession continues, economic conditions gradually begin to______The declines in spending eventually come to an end; households and firms begin to reduce their ______, thereby _________; and interest rates _____, making it more likely that households and firms will borrow to finance new spending. Firms begin to increase their spending on capital goods as they anticipate the need for additional production during the next expansion. Increased spending by households on consumer durables and by businesses on capital goods will finally bring the contraction or recession to an end and begin the next _________.
improve
debt
increasing their ability to spend
decline
expansion
in the aggregate demand and supply model, real GDP and price level are determined by
the intersection of the aggregate demand curve and the aggregate supply curve
Fluctuations in real GDP and the price level are caused by
shifts in ad or the SRAS
The aggregate demand (AD) curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms and the government, plus net exports.
The short-run aggregate supply (SRAS) curve shows the relationship in the short run between
the price level and the quantity of real GDP that would be supplied by firms at each price level.
The AD curve is downward-sloping because
a fall in the price level increases the quantity of real GDP demanded.
If the price level changes while other variables that affect the willingness of households, firms and the government to spend are unchanged, the economy will
move up oor down the AD curve
If any variable other than the price level changes, the AD curve will
shift
The variables that cause the AD curve to shift fall into three categories:
Changes in government and central bank policies
Changes in the expectations of households and firms
Changes in foreign variables.
a lower price level causes 3 things to happen what are they
raises the level of household wealth which increases consumption
lowers interest rates which increases investment and consumption
increases earnings from exports and decreases foreign imports as they become more expensive
Lower interest rates lower the cost to firms and households of borrowing. Lower borrowing costs should usually increase________
consumption and investment spending,
Higher interest rates shift the AD curve to the
left
An increase in government purchases shifts the AD curve to the
right
decrease in government purchases shifts the AD curve to the left
left
An increase in individual income taxes reduces the amount of after-tax income available to households. Higher individual income taxes reduce ______spending and shift the AD curve to the _______
consumption
left
An increase in company income taxes reduces the profitability of _______ and shifts the AD curve to the left
investment spending
A decrease in company income taxes shifts the AD curve to the
right
If households become more optimistic about their future incomes, they are likely to increase their
consumption
increased consumption will shift the AD curve to the
right
f households become more pessimistic about their future incomes, the AD curve will shift to the
left
if firms become more optimistic about the future profitability of investment spending then the AD curve will shift to the
right
f firms, households and governments in other countries buy fewer Australian goods and services or if firms, households and governments in Australia buy more foreign goods and services,
net exports will fall and the AD curve will shift to the left
If real GDP in Australia increases faster than real GDP in other countries, Australian imports will
increase faster than Australian exports and net exports will fall.
The long-run aggregate supply (LRAS) curve is a curve showing the relationship in the long run between
the price level and the quantity of real GDP that can be supplied when all firms are producing at normal capacity
Each year the LRAS curve shifts to the right as the number and/or ______ in the economy increases, more ____ are accumulated, and ________ occurs.
quality of workers
machinery and equipment
technological change
The SRAS curve is upward-sloping because, over the short run,
as the price level increases then the quantity of goods and services that firms are willing to supply will increase
The main reason why firms are willing to supply more goods and services as the price level rises is that
prices of final goods and services rise, prices of inputs—such as the wages of workers or the price of natural resources—rise more slowly
. A secondary reason why the SRAS curve slopes upward is that as the
price level rises or falls, some firms are slow to adjust their prices.
If the price level changes but other variables are unchanged, the economy will
move up or down a stationary aggregate supply curve.
If any variable other than the price level changes
the aggregate supply curve will shift.
an increase in the labour force or the capital stock or resources shifts the aggregate supply curve to the _____ because….
right
more output can be produced at every price level
an increase in productivity shifts the aggregate supply curve to the _____ because….
right
costs od production fall
an increase the expected future price level shifts the aggregate supply curve to the _____ because….
left
workers and firms increase wages and prices
an increase in workers and firms adjusting to having previously under-estimated the price level shifts the aggregate supply curve to the _____ because….
left
workers and firms increase wages and prices
an increase in the expected price of an important natural resource shifts the aggregate supply curve to the _____ because….
left
costs of production rise
