Chapter 11 - The Aggregate Supply and Demand Model Flashcards
Say’s law
Supply creates its own demand
Neoclassical economists
economists who emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run (basically those who believe in Say’s law)
Keynes’ law
Demand creates its own supply
Keynesian economists
economists who emphasize the importance of aggregate demand in determining the size of the macroeconomy over the long run (basically those who believe in Keynes’ law)
What view modern economists take
Keynesian in the short run, and neoclassical in the long run
Aggregate supply and demand model
shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
Aggregate supply (AS)
Quantity of output that businesses will produce and sell
Aggregate supply curve
Quantity of output that businesses will produce and sell at each price level
AS curve graph components
Horizontal: real GDP
Vertical: price level
Vertical line: potential GDP
Supply curve: sloping up
Problems at running past potential GDP
certain firms and industries will start running into limits, all of the expert workers in a certain industry will have jobs or factories in certain geographic areas or industries will be running at full speed. It will burn out eventually
Another term for potential GDP (first)
Full employment
Aggregate demand (AD)
Total spending on domestic goods and services in an economy (also called total planned expenditure)
Four components of AD
Consumption, investment, government spending, and net exports
Aggregate demand curve
Spending on domestic goods and services at each price level
AD curve components
Horizontal: real GDP
Vertical: price level
Demand curve: sloping steep down
Another term for AS curve
Short run aggregate supply curve
Another term for potential GDP at the vertical line (second)
Long run aggregate supply curve
Three reasons aggregate demand slopes downward
The wealth affect (prices go up so wealth goes down), interest rate affect (higher prices raises interest rates), foreign price affect (higher prices makes domestic product more expensive)
Most important factor for shifting the AS curve
Productivity growth
How productivity is measured
GDP per capita
3 things the inward shifting of equilibrium can cause
Reduced GDP or recession, higher unemployment, higher inflation
Stagflation
Stagnant economy with high unemployment and inflation
3 things the outward shifting of equilibrium can cause
Lower inflation, higher output, and lower unemployment
Higher business confidence is related to…
Higher consumption and investment demand
Cyclical unemployment is relatively large in the AD/AS framework when the equilibrium is…
Below potential GDP
Cyclical unemployment is small in the AD/AS framework when the equilibrium is…
Near potential GDP
How the balance of trade appears in the AD/AS diagram
Indirectly through changes in imports and exports
Movement from one equilibrium to another causes the price level to rise or to fall
Pressures for inflation in the AD/AS diagram
Three zones on the diagram
Neoclassical, Keynesian, and intermediate
Keynesian zone
Far left of SRAS that is relatively flat, equilibrium level of real GDP is far below potential GDP, economy is in recession, inflation is not a big worry
Neoclassical zone
Far right of SRAS that is near vertical, cyclical unemployment is low, shifts in AD create inflationary pressures
Intermediate zone
AD to the right, output is closer to potential GDP, reduced unemployment, higher price level and upward pressure on inflation (and vice versa)
