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Business cycles & Aggregate Demand/Supply Flashcards

1
Q

what does full employment level mean

A

everyone who wants a job can get one

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2
Q

what is the natural level of Gdp

A

full employment
GDP as high as it can be (all resources used)
There is competition for resources which is causing inflation

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3
Q

what does ceteris paribus mean

A

assumption that everything but supply and demand are held constant

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4
Q

what is monetary neutrality

A

changes in money supply are assumed to have no effect in the longrun but in the short run do have an effect

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5
Q

3 reasons why the AD curve is downward sloping

A

the wealth effect
the interest rate effect
the exchange rate effect

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6
Q

what does the wealth effect cause an increase in

A

consumption

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7
Q

what is the wealth effect

A

when prices go down, but your income doesnt and you feel more wealthy encouraging you to spend more

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8
Q

what does the interest rate effect cause an increase in

A

investment

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9
Q

what is the interest rate effect

A

prices fall and so househoods try to reduce their holding of money by lending it out, boosting savings and investment

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10
Q

what does exchange rate effect cause an increasein

A

net exports

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11
Q

what is the exchange rate effect

A

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

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12
Q

3 reasonswhy the AS curve upward sloping in the short run

A
  1. sticky wage theory
  2. sticky price theory
  3. misperceptions theory
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13
Q

what is the stiicky wage theory

A

wages are fixed by contracts, increase in prices reduces the real wage paid by the firm
wages change slowly

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14
Q

what is the sticky price theory

A

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

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15
Q

what are menu costs

A

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

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16
Q

what is the misperceptions theory

A

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

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17
Q

example of misperceptions theory

A

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

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18
Q

why is the AS curve vertical in the longrun

A

In the longrun, the production of goods and services only depends on the factors of production, price level wont change long run output

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19
Q

where is the long run AS placed

A

natural/potential level of output

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20
Q

what are the factors of production that can change long run supply

A

labour
capital
natural resources
technology

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21
Q

what causes shifts in the AD curve1

A

components of GDP
eg change in government spending, changes in investment, consumption or net exports
changes in supply of money

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22
Q

when supply of money is increased, does AD shift right or left

A

right

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23
Q

what causes a shift in the long run AS curve

A

anything that changes potential output (factors of production)

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24
Q

what causes shifts in the AS short run curve

A

factors of production eg shifts in labour due to immigration/emigration, change in technological knowledge, natural resources or capital
expected price level

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25
what is the long run equilibrium
when the SRAS, AD equilibrium also hits the LRAS
26
inflation causes the AD curve to shift in what direction
right
27
deflation causes the AD curve to shift in what direction
left
28
over time the LRAS curve should shift more to what direction, why
left, better production factors eg improved tech
29
highest point in a business cycle is called
peak
30
lowest point in a business cycle is called
trough
31
difference between peak and trough is called
amplitude
32
whta is aggregate demand
quantity of all goods and services demanded in an economy at any given price level
33
what is aggregate supply
total quantity of all goods and services that firms sell at any given price
34
in an expansionary period is GDP growing or contracting
growinf
35
in a recession or a depression is GDP growing or contracting
CONTRACTING
36
in the longrun, GDP grows but in the short run it....
fluctutes
37
is recovery considered growth
no
38
what is recovery
GDP expands after a recession or depression. Recovery lasts until long term potential level is reached again
39
what are output gaps
difference between actual and potential outputs
40
if something makes production more expensive, will thi shift SRAS to the right or left
left
41
if something makes prodution cheaper, will this shift SRAS to the left or right
right
42
if the LRAS is above the equilibrium, what period is the economy in
recession
43
if the LRAS is below the equilibrium, what period is the economy in
boom/expansion
44
if the LRAS is equal to the equilibrium, what period is the economy in
Long run equilibrium
45
what was the name for the high risk mortgages given out prior to the 2008 financial crisi
sub prime
46
examples of countries who requested bailouts in 2010 + after recession
portugal greece ireland
47
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
48
why was there pressure to give sub prime mortgages in years leading to 2008
seen as positive that everyone could afford housing political pressure
49
how did covid change demand
some goods/services no longer available because of lockdown eg hospitality some goods/services increase in demand eg dumbells
50
how did covid cause a supply shock
movement of goods and services slowed some businesses shut down
51
what is used in forecasting growth
consumer confidence firm invetsments interest rates trends in income, employment and gdp
52
what is contraction
when the output is lower than the previous period
53
what is a tredn
a long term movement
54
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
55
what are external forces
events abroad unexpected events eg tsunmai
56
what is an economic bubble
prices of assets and securities are way above their fundamental value
57
what are procyclical variables to GDP | give example
variables that move together with gdp eg employment, investment, consumption, productivity
58
what are countercyclical variables to gdp | give examples
move in opposite directions to gdp eg government spending increases during crisis unemployment real wages
59
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
60
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

Economics (25 decks)

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