Aggregate Supply Flashcards
Aggregate Supply def
Level of real GDP produces at different price levels in a given year
2 views of AS +. slope
- Keynesian
Horizontal AS curve
-Classical
Vertical AS curve
Keynesian belief + when most relevant
Full unemployment cannot be achieved
Prices are fixed and rigid
Government intervention to avoid depression or recession
“demand creates its own supply”
-Most relevant during recessions
Keynesian belief of what happens to AS curve in a recession
Horizontal AS curve because wages are fixed so
-Price levels are constant
-real GDP and employment rise
Classical belief + when most relevant
Recessions are natural
Prices are flexible
Full employment naturally restored, no government intervention needed
“Supply creates its own demand”
-most relevant during full employment
Classical belief of what happens during a recession
Prices and wages adjust to restore economy to full employment
Intermediate range def
When economy is moving toward or away from recessions and periods of full employment.
What happens during intermediate ranges
Inventories and employment are shrinking or expanding
AS curve elastic
Macroeconomic equilibrium def
AS and AD intersect
What happens when AD increase for Keynesian range
Price levels are constant, real GDP expands
What happens when AD increase for intermediate range
Price levels increase, real GDP increase
What happens when AD increase for classical range
Increase AD cause inflation
What happens when AD increase for classical range
Increase AD cause inflation
Non-Price determents of AS (5) + what do they affect
-resource prices
-tech change
-taxes
-subsidies
-regulations
They affect production cost
Lower production cost on AS curve + EX
Increase GDP supply, rightward shift
EX Lower taxes, lower oil prices, lower G regulations
Higher production cost on AS curve+ EX
Lower GDP supply, leftward shift
EX Higher taxes, higher G regulations, lower wages
A leftward shift in AD curve can cause a
Recession
The business cycle is a result of …
shifts in the AD and AS curves
A rightward shift in AD curve can cause
real GDP and employment to rise
A leftward shift in AS curve can cause a
downswing
A rightward shift in AS can cause an
upswing
Classical approach to a downturn in the business cycle is for the gov to do nothing
True. Recessions naturally curve themselves and the systems’s automatic stabilisers natural restores full employment
Ex of what can shift AD to the right
Consumers become optimistic about the future
For Keynesian belief, if the equilibrium real GDP is below full employment level, increase in AD results in
Price remains constant
Real GDP rises
In intermediate range if increase AD, what happens
Increase real GDP and price levels
