Chapter 1 Flashcards
short-run, medium-run, long-run, very long-run model
What is the very long-run model?
The domain of growth theory that focuses on the growth of the production capacity of economy
What is the long-run model?
A snapshot of the very long-run model where capital and technology are fixed
What is the short-run model?
Domain of the business cycle, focuses on production capacity in relation to demand
What does the very long-run study?
The accumulation of inputs leading to increased standard of living
What assumptions dow we make about the very long-run?
We assume all inputs (labour, capital, raw material, etc) are fully employed
What is the sole determinant of supply in the long run?
supply, essentially the productive capacity of the economy
What is always the cause of inflation in the long run? What causes changes in price?
aggregate demand, demand relative to output
Full employment, aka ….
potential output
What is used to account for short run fluctuations in output?
aggregate demand
What angle is the aggregate supply curve in the short run?
horizontal
In the short run, what does aggregate demand determine?
output, and thus unemployment
What does the medium run show?
The process that shifts aggregate supply from horizontal to vertical
What causes the medium run shift in the aggregate supply curve?
high aggregate demand pushes above output level, firms start raising prices and the aggregate supply tilts upwards
What is the Philips curve?
relates price changes to the inflation rate and the unemployment rate over time
What is the output growth rate?
the speed at which real GDP is increasing
What two things cause GDP to grow over time?
- The available resource in the economy change
- Efficiency of factors of production change
What is the buisness cycle?
the irregular pattern of expansions and contractions of economic activity around the path of trend growth
How is the business cycle measured?
from peak to peak or trough to trough
What is the output gap?
Deviations of actual output from potential output
What is a recession?
The period of a business cycle from peak to trough
What is the relation between output gap and inflation (+/-)?
positive
What does growth theory explain?
the very long-run behaviour of the economy through understanding how productive capacity grows
