CH17: AD and AS Flashcards
What AD factor goes down the most in a recession?
(I) Investment Spending
Relationship between unemployment and output?
Decrease in output results in increase in unemployment.
3 reasons why AD curve slopes downwards?
Wealth effect: Decrease in P means C feel more wealthy, therefore C falls.
Interest-rate effect: Lower P means lower interest rate, therefore greater spending on investment -> I increases.
Exchange-rate effect: Fall in P means interest rates fall, NZD depreciates, therefore NX increases.
Interest rates and money supply?
Demonstrate using money market model.
Why is the AS curve vertical in the LR?
P doesn’t affect AS in LR. Only AS factors such as supply of labour, tech costs, capital and natural resources, etc.
3 reasons as curve slopes upwards in the SR?
Sticky-Wage Theory: Wages don’t immediately adjust to changes in price. Lower P means employment + prod less profitable, so firms reduce QS.
Sticky-Price Theory: Unexpected fall in P leaves some firms with higher-than-desired prices. Sales fall, so QS falls.
Misperceptions Theory: Changes in P mislead suppliers about what is happening in the markets. Misperceptions about relative prices. Causes suppliers to decrease QS.
Effect of change in expected price on AS?
Workers expecting higher prices will demand higher wages. Therefore AS shifts left.
What is stagflation?
Caused by adverse shifts in AS.
Output falls and prices rise.
Policymakers influencing AD can’t fix both at the same time.
Problems with existing stagflation?
Policymakers increasing AD will return output to natural rate, but increase price even more.
Might be better to wait for AS to shift back, as less demand for labour will cause wages to fall making AS shift right eventually.
