Chapter 12 Flashcards
Asset-price bubble
Happens when people buy assets for no reason other than they think the price will go up
What does the aggregate demand and aggregate supply model demonstrate
How output, prices, and employment are determined and how they affect each other
What does aggregate demand mean
It describes the total demand for all goods and services in the economy
This means adding up demand across all the individual markets for goods and services
What does the aggregate demand curve show and what direction is the slope
The relationship between the overall price level and the level of total demand on the economy
Slopes downward
What does the relationship between price and aggregate demand show in the curve
That as prices decrease, the quantity of aggregate output demanded increases
What causes a rightward shift of aggregate demand
An overall increase in consumption, GDP is higher at every price level
What causes a leftward shift in aggregate demand
A decrease in overall consumption, at each price level GDP is lower
How does consumer and business confidence shift the aggregate demand curve
An increase in confidence will shift the curve to the right
A decrease in confidence will shift the curve to the left
How does consumption and higher taxes shift the aggregate demand curve
Increased consumption shifts the demand curve to the right
Higher taxes shifts the demand curve to the left
What can the government do in a recession to shift the demand curve
Increase spending in order to shift the demand curve to the right
What factors cause the aggregate demand curve to shift right
Consumption: -increase in spending -tax cuts Investment: -increased confidence -tax credit Government spending: -increase spending Net Exports: -new free trade agreement -economic growth
What factors cause the aggregate demand curve to shift left
Consumption: -less spending -higher interest rates Investment: -firms cut back on spending -taxes on capital increase -higher interest rates discourage borrowing Government spending: -decreased spending in response to concerns about debt Net Exports: -other countries increase tariffs -the dollar strengthens making Canadian goods more expensive
What is the multiplier effect
Means that each additional dollar of expenditure in the economy leads to more than one dollar of output
What is aggregate supply
The sum total of the production of all the firms in the economy
What does the aggregate supply curve demonstrate
The relationship between the overall price level in the economy and total production by firms (output)
What are the two differences between the aggregate and market supply curves
- The aggregate supply curve represents production in the economy as a whole rather than just one good or service
- Difference between how the economy operates in the short run and long run
What does short run refer to
The hourly, daily or weekly decisions that firms have to make
How does the curve slope in short run aggregate supply
Slopes upward
-as overall price levels increase, firms are willing to produce more
Why do prices of final goods and services increase more quickly than inputs
When price level increases, input prices don’t all increase immediately
What is long run aggregate supply
However long it takes for prices of inputs to fully adjust to changes in economic conditions
What does the LRAS look like
It is a vertical line. Changes in the overall level of prices do not influence the level of output in the economy
What determines the quantity of output supplied in the long run
The level of output possible if the economy is operating at full capacity
What is the business cycle
Fluctuations of GDP either above or below the potential level of GDP in the economy
What factors cause a shift in the SRAS
-change in the costs of production
When the price of oil increases the curve shifts left
-supply shocks
What is a supply shock
Significant events that directly affect production and the aggregate supply curve in the short run
What is an example of a negative supply shock
A major flood that distrusts the power grid and ruins crops. Reduce in the quantity of goods supplied and shifts the curve to the left
What is an example of a positive supply shock
If firms anticipate that wages are likely to decrease, then producers will expect lower input costs in the future. Increase in the quantity of good supplied and shifts the curve to the right
What factors cause a shift in the LRAS
Anything effecting output related to land, technology, capital, and labour,
What direction will the LRAS curve shift if potential output expands
To the right
What direction will the LRAS curve shift if the economy loses productive capacity
To the left
What factors increase LRAS (shift right)
Technology:
-technological innovation allows for greater production using the same amount of inputs
Capital:
-foreign investment increases capital
Labour:
-immigration increases supply of labour
Education:
-Universal primary education allows everyone to go to school
Natural Resources:
-new energy sources allow factories to produce more with the same inputs
What factors decrease the LRAS (shift left)
Technology:
-reduce in incentive to innovate
Capital:
-depreciation and wear break down capital
Labour:
-aging population takes workers out of the work force
Education:
-reduction of university grants
Natural Resources:
-climate change reduces the amount of land that can be farmed
Do the LRAS and SRAS always shift together
No.
Everything that shifts the LRAS curve will also shift the SRAS curve
Not everything that shift style SRAS curve will also shift the LRAS curve
What curve do changes in expected prices shift
The SRAS curve (an increase shifts the curve left)
Explain the effect of an increase in aggregate demand
- increased consumer confidence shifts the aggregate demand curve out and right. At this new equilibrium out put and prices are higher
- as wages and prices shift it becomes more costly to produce goods so short run aggregate supply shifts left
Explain the effects of a decrease in aggregate demand
- when aggregate demand shifts left, the new short term equilibrium moves to where prices and output are both lower
- lower prices and input make it cheaper for firms to produce goods so the aggregate supply curve shifts out
What curve do temporary supply shocks shift
The SRAS curve
What is stagflation
A situation in which output decreases while prices increase
What is the effect of a decrease in short run supply? Example a drought in the prairies
A drought will shift the short run aggregate supply curve left and in the short run prices will be higher and output falls
As rainfall returns and wages fall the short run aggregate supply will shift right meaning that prices and output return to their original level
What is the effect of a decrease in long run supply? Example climate change
With climate change the aggregate supply curve shifts in and prices are higher and output falls
Since these effects are permanent, the LRAS curve shifts to the left and The SRAS also shifts to the left until it reaches a new equilibrium. At this point prices are much higher and output is lower than the original equilibrium.
If a shock only relates to prices does it effect supply or demand and what curve does it effect
Supply side. It will affect the SRAS curve.
How does the government respond to a negative demand shock
In this case, aggregate demand Drops sharply shifting the curve in. The new short term equilibrium has lower prices and output
If the government increases spending in response the aggregate demand will shift back out. The new equilibrium is at a higher level of prices and output but still below the long term equilibrium
How does the government respond to a negative supply shock
The short run aggregate supply curve will shift in,the new short run equilibrium will have higher prices and lower output
Increased government spending will shift the aggregate supply curve out, and the new long term equilibrium is at a higher level of prices
