Chapter 11 Flashcards
What event occurred around the early 1930s
The Great Depression
What event occurred around the late 2000s
The Great Recession
According to the AD-AS model, a significant increase in individual income taxes will have what effect on the economy
the economy will experience lower economic growth
Aggregate supply (AS) denotes the relationship between the ________ that firms choose to produce and sell and the_________ holding the______ fixed
total quantity, price level of outputs, price of inputs
The maximum quantity that an economy can produce, given its existing levels of labor, physical capital, technology, and institutions, is called
Potential GDP
The flat, downward sloping shape of the AD curve shows
- that a lower price level for final outputs increases aggregate demand because of the wealth, interest rate, and foreign price effects
2.that the change in the quantity of aggregate demand is very large.
an increase in structural unemployment can be caused by what?
a decrease in aggregate demand
When do we hit equilibrium in a AS-AD model?
when aggregate supply and aggregate demand are the same
which economist believed that the level of GDP in the economy is not primarily determined by the potential of what the economy can supply, but rather by the amount of total demand.
Keynes
as the price level increases, the buying power of savings that people have stored up in bank accounts/assets diminish due to inflation (results in reduced consumption), this is known as the;
The Wealth Effect
as prices for outputs rise, the same purchases will take more money or credit to accomplish (results in reduced consumption and investment), this is known as the;
The Interest Rate Effect
points out that if prices rise while remaining stable in other countries then goods will be relatively more expensive compared to goods in the rest of the world (results in reduced net export), this is known as the;
The Foreign Price Effect
What causes the AD curve to slope downwards?
the foreign price effect, the wealth effect, the interest rate effect
which factor will have the greatest influence on the slope of the demand curve in a SINGLE market model?
substitution effect
What state exists when an economy experiences high unemployment and high inflation at the same time?
Stagflation
What happens as the aggregate price level(measure of the overall prices in an economy) in an economy decreases?
imports decrease
modern economists who agree to the says law view on the importance of supply for determining the size of the economy are referred to as..
Neoclassical Economists
According to the AD-AS model, a significant increase in individual income taxes will have what effect on the economy?
economy will experience lower economic growth
Aggregate supply curves are __________ at low levels of output and are ________ at high levels of output?
relatively flat; relatively steep
Potential GDP is unaffected by the..
unemployment rate
when an economy’s output increases, and the price level decreases. In an AD-AS model, which curve will shift and towards what direction?
AS;right
The zone of the AS-AD model labelled farthest to the left is known as the
Keynesian Range
What factors occur in the Keynesian Range
-aggregate demand increases
-inflation remains low
-unemployment is high
-economy is in recession
-where the economy has excess capacity
The zone of the AS-AD model labelled farthest to the right is known as the
Neoclassical range
What factors occur in an neoclassical range?
-unemployment is low
-structural unemployment may remain an issue
-any increase in SRA produces inflation
The zone of the AS-AD model labelled in the middle is known as the
Intermediate Zone
What factors occur in the Intermediate zone?
-unemployment and inflation move in opposing directions
-a shift of AD to the right will reduce unemployment
-a shift of AD to the left will raise unemployment
Changes in the price level of output, are reflected in the AD-AS macroeconomic model by what?
downward sloping AD curve
what could explain a rise in cyclical unemployment?
a shift to the left in the AS or AD curves
What element in an AD-AS diagram is most relevant to Say’s Law?
the steep portion of the AS curve
real GDP is shown on what axis
horizontal
Which of the following must be present in order for the aggregate supply curve to show an upward slope?
fixed cost of inputs combined with rising prices for outputs
which law says “supply created its own demand”
Says law
potential GDP is also known as
full employment GDP
Which economist was in favour of competition, free trade and lifting restraints on business
Jean Baptiste Say
what is known as the total quantity of goods and services people want to purchase at all price levels called in macroeconomics?
aggregate demand curve
an increase in structural unemployment can be caused by what
a decrease in aggregate demand at all prices.
total quantity of output (products/services) produced at a given price is known as (real gdp)
aggregate supply
the total quantity produced at all prices is referred to as
Aggregate supply curve
is known as the amount of total spending on domestic goods and services in an economy at a certain given price level; includes consumption, investment, government spending and net exports
aggregate demand
is referred to the total quantity spending on domestic goods and services at each possible price level
aggregate demand curve
is known as the intersection of the aggregate supply and aggregate demand curve, where aggregate supply equals aggregate demand
equilibrium (in real gdp and in price level)
When supply EXCEEDS demand
deflationary pressures
where demand EXCEEDS supply
inflationary pressures
Short Run Aggregate Supply
a period in which input prices do not change, upward sloping
Long Run Aggregate Supply
showing no relationship between the price level for output and real GDP in the long run, vertical line of potential GDP
policies that seek to increase aggregate demand are known as
expansionary
policies that seek to reduce aggregate demand are known as
contractionary
how do we recognize periods of recession and economic booms in the AD-AS model?
-if the equilibrium is far from the potential GDP line (LRAS line) it represents and economy in recession
How do we recognize economic growth in the AD-AS Model?
-a gradual shift to the right of both the SRAS and LRAS curves
-if the AD curve does not change the price levels will go down
How do we recognize when inflation occurs in the AD-AS model?
-if the AD shifts to the right when the economy is already near potential GDP/Full employment
-the contraction in aggregate supply
cyclical unemployment is caused by
the business cycle as economy expands and contracts
a long run unemployment variation is known as
natural unemployment
What change in the economy would cause an increase in the purchasing power of a consumer’s savings?
deflation
