Chapter 14 Flashcards
What is the main reason for fluctuating Real GDP over time?
External forces
government policies, and general business conditions
Is the growth of real gdp predictable?
No, it is quite volatile, and does not follow a pattern
what are the two types of economic fluctuations?
Short run and long run
what is aggregated demand?
What happens to aggravated demand if government expenditure increases?
What is Aggregated supply?
the total demand of all consumers, business, government, and foreigners of all final goods and services produced in an economy
AD = GDP
G increases AD increases
AS:
a total of all goods/services supplied by all firms in the economy
What do P and Q represent on an aggregate demand graph (goods-producing market)? What causes a shift in AD?
p = GDP deflator
Q = real gdp
Qe = level of current production
AD shifters
Change in population, monetary and fiscal policy (expansionary would shift it right)
Why when prices fall does aggregate demand go up? (3)
The wealth effect: (dumb one)
Prices fall, behave similar to receiving a raise
Interest Rate Effect:
Lower price level reduces the interest rate - no inflationary pressures gives B of C room to lower interest rate
Real Exchange rate effect:
lower price level causes RER to fall, which stimulates Canadian exports
What is demand-pull inflation?
The GDP deflator goes up as GDP goes up
Demand shifts right increasing the above
What is the trade off for inflation and unemployment?
Increased inflation leads to low unemployment
vice versa
It only happens when AD curve shifts
What is an example of a Supply Shock?
Change in the price of input materials
ex. oil price
What is cost push inflation?
The cost of supply increases causing a shift in the supply curve, that causes a decrease in GDP and price inflation
What is Stagflation?
Stagnating economy plus inflation
everyone is screwed, fiscal policy does not work, Monetary policy does not work
What should you focus on during a recession?
Shifting the AD curve, shifting the supply curve does not end well since firms ‘pocket the money’
What are factors shift the LRAS?
Changes in:
-Technology
-Capital Stock
-Human Capital
If you are at where AD SAS and LRAS intersect, what happens when you implement a expansionary policy?
You cause an increase in inflation
No more production since you are at max capacity
If LRSA is to the left of SAS what policy should be implemented
Contractionary policy
