AS/AD Study Flashcards
The Relationship between Price Level and GDP
If Price Level increases (inflation) then Real GDP demanded falls
If Price Level decreases (inflation) then Real GDP demanded rises
What are the 3 reasons AD is downward sloping
The Wealth effect
Interest Rate effect
Foreign Trade effect
What doesn’t shift AD? But causes a movement along the curve
Changes in PRICE LEVEL
Shifters of AD
C + I + G + Xn
The difference between short-run and long-run AS
In short-run wages and resource prices are sticky and WILL NOT change when price level changes
In long-run wages and resource prices are flexible and WILL change when price level changes
Negative Output Gap
Likely in recession
Full Employment
Max. sustainable capacity
Positive Output Gap
Unsustainable capacity overworking
Causes of Inflation
Demand Pull Inflation (AD increase)
Cost-Push Inflation (SRAS increase)
Capital Shock
Machinery and tools purchased by businesses that increase their outputs
Key shifter of LRAS
Only investment causes growth since firms increase their capital stock, ONLY INVESTMENT SHIFTS LRAS
The shifters of the LRAS
Change in resource quantity or quality
Change in Tech
The Wealth Effect
Higher price levels reduce purchasing power, price level doubles people gonna buy less
The Interest Rate Effect
When the Price level increases lenders must charge more to get a real return on their loan
Foreign Trade Effect
When US Price level rises, foreign buys purchase less Us goods and Americans buy more Foreign goods
