Ch 21 - Aggregate Demand & Supply Flashcards
What does the aggregate demand (AD) curve represent?
Relationship between total quantity of goods/services demanded & overall PL
Why does AD curve slope downward?
Cuz of Wealth, Interest, and Exchange Rate Effects
What happens to AD when the price level decreases?
Quantity of goods/services demanded increases.
What are the four components of AD?
Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX).
How does a decrease in interest rates affect AD?
Encourages more investment & increases AD.
What happens to AD when government spending increases?
AD shifts to right (increases).
How does a decrease in taxes affect AD?
Increases disposable income, leads to higher consumption & rightward shift in AD.
How do changes in net exports affect AD?
NX - Increase shifts right, while decrease shifts it left.
What is the equation for AD?
AD = C + I + G + NX
What does the aggregate supply (AS) curve show?
Total quantity of goods/services firms produce at diff price levels
Why is the short-run AS (SRAS) curve upward-sloping?
Due to sticky wages/prices, & misperceptions.
Why is the long-run AS (LRAS) curve vertical?
Output is determined by resources, tech, & productivity (not price lvl)
What causes the SRAS curve to shift?
Changes in productivity, resource prices, & gov policies
What happens when input prices increase?
SRAS curve shifts left, reducing supply.
What happens when productivity increases?
SRAS shifts right, increasing output.
What is full-employment output?
Natural lvl of GDP when economy is at full employment
How does the AS curve behave in the long run?
Its vertical cuz output is not affected by price levels.
What happens when social institutions impose more regulations on businesses?
AS decreases due to higher production costs.
What happens when AD increases in the short run?
Real GDP increases, leading to an economic expansion.
Where is long-run equilibrium found?
Where AD, SRAS, and LRAS intersect.
What happens when AD decreases in the short run?
Real GDP decreases, leads to recession.
What is cyclical unemployment?
Unemployment caused by fluctuations in AD, (like during a recession)
How does the economy adjust after a recession in the long run?.
Wages & input prices fall, shifting AS right & restoring full employment.
What happens if AD increases beyond full employment?
Inflation rises as firms struggle to meet high demand.
How does stagflation occur?
AS decreases, causing inflation & unemployment to rise.
What is the role of expectations in AS shifts?
If firms expect higher future prices, they reduce supply now, shifting SRAS left.
What causes a movement along the AD or AS curve?
Change in price level.
What is demand-pull inflation?
Inflation caused by an increase in AD.
What is cost-push inflation?
Inflation caused by decrease in AS due to higher input costs.
How does monetary policy affect inflation?
Increase money supply - shifts AD right, leads to inflation.
What happened in the 1970s that caused stagflation?
Significant increase in input costs (oil prices), reducing AS.
How can cost-push inflation be controlled?
By improving productivity & reducing production costs.
What is the difference between short-run and long-run inflation effects?
SR - inflation & unemployment have inverse relationship / LR - no tradeoff exists.
What does the Phillips Curve show?
The short-run inverse relationship between inflation and unemployment.
What happens to unemployment when inflation rises in the short run?
Unemployment decreases.
What happens in the long run according to the Phillips Curve?
LR Philips C - vertical, no tradeoff between inflation & unemployment
How do expectations affect the Phillips Curve?
If peeps expect inflation, wages rise, shifting SRAS left & maintaining unemployment
What happens when AS falls due to stagflation?
Inflation & unemployment increase.
What is the business cycle?
Fluctuations in economic activity over time (expansion, peak, recession, trough).
What causes recessions?
Leftward shift in AD or AS.
What causes economic expansion?
Rightward shift in AD or AS.
What is the role of government in stabilizing AD?
Govs use fiscal & monetary policies to manage economic fluctuations.
What happens when imports increase relative to exports?
Net exports decrease, shifting AD left.
What happens to the economy when AS shifts right?
Real GDP increases, price levels decrease, and unemployment falls.
What is the Interest Rate Effect on AD?
Lower price levels reduce interest rates, increasing investment and AD.
