CH11: Aggregate Demand & Supply Flashcards
What model is commonly used in modern macroeconomics for policy analysis?
The Aggregate Demand–Aggregate Supply (AD-AS) model.
What does the AD curve represent?
Total demand for goods/services at various price levels.
What does the AS curve represent?
Total supply of goods/services at various price levels.
What causes the AD curve to slope downward?
Wealth effect, interest rate effect, and international trade effect.
What is the wealth effect?
Lower prices increase real income, raising demand.
What is the interest rate effect?
Lower prices reduce interest rates, increasing investment and demand.
What is the international trade effect?
Lower prices weaken currency, increasing exports and reducing imports.
How does SRAS differ from LRAS?
SRAS is upward sloping; LRAS is vertical.
What determines the position of the LRAS curve?
Quantity and productivity of factors of production.
What happens when AD shifts right due to expansionary policy?
Higher output and higher price levels (inflation).
What is stagflation?
A situation of rising prices and falling output (inflation + stagnation).
What causes the AS curve to shift right without inflation?
Increased productivity without higher factor costs.
What is monetarism’s core belief about money and prices?
Changes in money supply directly affect price levels.
What are key principles of supply-side economics?
Cut taxes, reduce regulation, shrink government spending, privatize.
Why do supply-siders support privatization?
They believe the private sector uses resources more efficiently.
What do new classical economists believe about expectations?
People form rational expectations using all available info.
What do new Keynesians emphasize?
Market imperfections and sticky wages/prices.
How do new Keynesians differ from new classicals?
They reject the idea of always-clearing markets.
