AS AD Model Flashcards
What is output in the long run known as, and what is it diagramed as
The natural rate of output (Ynr)
A vertical line, where in the long run shifts in AD will only affect prices not output
What shifts LRAS (3)
Capital or labour or technological knowledge
Market oriented supply side policy and which theorists use
Interventionist and which theorists use
Government don’t intervene-provide incentives
Used by classicists
Interventionists is direct intervention-Keynesians approach
What does the form of SRAS depend on
Whether you assume prices are completely flexible-vertical (classicists) or sticky-horizontal (keynesians) or ‘in-between-upward sloping
What would classical SRAS look like
Vertical (like LRAS) as prices can move
What does Keynesian SRAS look like and why
Horizontal because of sticky prices. In real life many prices don change instantly. E.g menu costs etc.
What causes SRAS to shift
Change in cost of production
NOTE: A change in quantity of FOP can also shift SRAS e.g increase in labour supply can lower wages, thus lowering costs and SRAS
What does a negative demand shock cause in Keynesian
A move from the long to short run equilibrium, a leftward shift creating a recessionary gap where actual output is less than natural rate, lower output and increased unemployment.
How does the short run go to the long run
Unemployed are willing to accept lower wages, so production costs fall, thus shifting SRAS lower. Continues until back at natural rate but at a lower price.
Why do classical thinks AD curve slopes downwards
Quantity theory of money= M x V = P x Y
If money supply and velocity are constant, if price increases, Y must full, which is visualised in the downward sloping line.
Expansionary fiscal policy on AS-AD (link IS-LM model)
Increase inn G or fall in T causes increase in planned expenditure (e) in Keynesian cross.
Translates to a rightward shift in IS-higher Y in IS at a given r.
Also translates to a rightward shift in AD-higher Y at a given price
Expansionary monetary policy on AS-AD
Money supply increases and shifts (M/P), interest rate (r) lowers in the RMB model.
This shows a lower interest rate at a higher Y
Translated to a downward shift in LM
For AD, a higher Y at the same price so shifts
How does AD curve link to ISLM model
AD curve shows relationship between price level and output.
Fall in output=Increase in Price (shown in downward sloping AD curve
Also quantity theory, if we assume M and V are constant. For equality to hold, P increase if Y falls
What do shifts in IS or LM cause in AS-AD model
Shifts in AD
