Business cycles & Aggregate Demand/Supply Flashcards
what does full employment level mean
everyone who wants a job can get one
what is the natural level of Gdp
full employment
GDP as high as it can be (all resources used)
There is competition for resources which is causing inflation
what does ceteris paribus mean
assumption that everything but supply and demand are held constant
what is monetary neutrality
changes in money supply are assumed to have no effect in the longrun but in the short run do have an effect
3 reasons why the AD curve is downward sloping
the wealth effect
the interest rate effect
the exchange rate effect
what does the wealth effect cause an increase in
consumption
what is the wealth effect
when prices go down, but your income doesnt and you feel more wealthy encouraging you to spend more
what does the interest rate effect cause an increase in
investment
what is the interest rate effect
prices fall and so househoods try to reduce their holding of money by lending it out, boosting savings and investment
what does exchange rate effect cause an increasein
net exports
what is the exchange rate effect
as the value of your currency falls, other countries want to switch to using your products as theyre relatively cheaper. The exports in your country increase and inports decrease
3 reasonswhy the AS curve upward sloping in the short run
- sticky wage theory
- sticky price theory
- misperceptions theory
what is the stiicky wage theory
wages are fixed by contracts, increase in prices reduces the real wage paid by the firm
wages change slowly
what is the sticky price theory
firms don’t just adjust prices immediately in repsonse rto any change in the eonomy,
Stable prices keep regular customers
Menu costs, hard to change
what are menu costs
prices that are associated with printed catelogues and menus, changing these would be expensive and can’t be dont every time there is a change in the economy
what is the misperceptions theory
changes in the overall price level can mislead suppliers in the individual markets they operate in
ie. is this a change in my individual market or inflation/deflation in the economy as a whole
example of misperceptions theory
firm may give a raise to its employees because of inflation, their nominal wage has increase butnot their real wage
However, the employees respond as if they are making more money
why is the AS curve vertical in the longrun
In the longrun, the production of goods and services only depends on the factors of production, price level wont change long run output
where is the long run AS placed
natural/potential level of output
what are the factors of production that can change long run supply
labour
capital
natural resources
technology
what causes shifts in the AD curve1
components of GDP
eg change in government spending, changes in investment, consumption or net exports
changes in supply of money
when supply of money is increased, does AD shift right or left
right
what causes a shift in the long run AS curve
anything that changes potential output (factors of production)
what causes shifts in the AS short run curve
factors of production eg shifts in labour due to immigration/emigration, change in technological knowledge, natural resources or capital
expected price level
what is the long run equilibrium
when the SRAS, AD equilibrium also hits the LRAS
inflation causes the AD curve to shift in what direction
right
deflation causes the AD curve to shift in what direction
left
over time the LRAS curve should shift more to what direction, why
left, better production factors eg improved tech
highest point in a business cycle is called
peak
lowest point in a business cycle is called
trough
difference between peak and trough is called
amplitude
whta is aggregate demand
quantity of all goods and services demanded in an economy at any given price level
what is aggregate supply
total quantity of all goods and services that firms sell at any given price
in an expansionary period is GDP growing or contracting
growinf
in a recession or a depression is GDP growing or contracting
CONTRACTING
in the longrun, GDP grows but in the short run it….
fluctutes
is recovery considered growth
no
what is recovery
GDP expands after a recession or depression. Recovery lasts until long term potential level is reached again
what are output gaps
difference between actual and potential outputs
if something makes production more expensive, will thi shift SRAS to the right or left
left
if something makes prodution cheaper, will this shift SRAS to the left or right
right
if the LRAS is above the equilibrium, what period is the economy in
recession
if the LRAS is below the equilibrium, what period is the economy in
boom/expansion
if the LRAS is equal to the equilibrium, what period is the economy in
Long run equilibrium
what was the name for the high risk mortgages given out prior to the 2008 financial crisi
sub prime
examples of countries who requested bailouts in 2010 + after recession
portugal
greece
ireland
what is the political business cycle
that governments persue expansionary periods ahead of elections to increase chance of reelection
(whats good for politicians in the short run rather than fixing the root of issues)
its hard to win elections saying you’ll save money for future problems when opponents are solving current problems
why was there pressure to give sub prime mortgages in years leading to 2008
seen as positive that everyone could afford housing
political pressure
how did covid change demand
some goods/services no longer available because of lockdown eg hospitality
some goods/services increase in demand eg dumbells
how did covid cause a supply shock
movement of goods and services slowed
some businesses shut down
what is used in forecasting growth
consumer confidence
firm invetsments
interest rates
trends in income, employment and gdp
what is contraction
when the output is lower than the previous period
what is a tredn
a long term movement
causes of changes in the business cycle
household spending changes eg how much labour they decide to supply
firms decision making eh how much to invest and produce
external forces eg war
government policy eg about taxes, infrastructure, investment
confidence and expectations eg security of jobs influences decisions
what are external forces
events abroad
unexpected events eg tsunmai
what is an economic bubble
prices of assets and securities are way above their fundamental value
what are procyclical variables to GDP
give example
variables that move together with gdp
eg employment, investment, consumption, productivity
what are countercyclical variables to gdp
give examples
move in opposite directions to gdp
eg government spending increases during crisis
unemployment
real wages
why does government spending increase during a crisis
maintains a steady GDP,
stimulates consumption(compensating for a shock in demand)
protects peoples saving
save existing jobs
what would ahppen to the AD if governments were to decrease spending during a recession
AD shifts down even more
LRAS could eventually shift, lowering production levels eg Greece has still not returned to pre 2008 levels
