Chapter 14 - Aggregate Supply and Aggregate Demand Flashcards
GDP grows about ____ per year
2%
GDP fluctuates around (SR or LR trend) known as _____
Sr trend known as business cycles
recessions are
falling real incomes and rising unemployment
depressions
severe and rare recession
3 facts are…
- irregular + unpredictable
- most macroeconomic qualities fluctuate together
- as output falls, UE rises
Agg-D curve shows…
Q of G/S households, firms + gov’t want to buy at each level
Agg-S curve shows
Q of G/S firms produce at each level
Why does Agg-D curve slope down? (3)
-(remember Y = C + I + G + NX; G = fixed gov’t policy)
incr in P reduces G/S Demand b/c: wealth effect (C falls), IR effect (I falls), exchange rate effect (NX falls)
Why would Agg-D curve shift?
examples?
- shift if any event changes C, I, G, or NX (except P)
- examples: boom/crash (C), spending (G), taxes (I), international boom/crash (NX)
Agg-S curve vertical b/c?
Y(new) determined by Supply of labour, capital, natural resources, + level of technology. incr in P d/n affect any of these.
Why might Agg-S curve shift?
-examples…
any change in determinants of Agg-S curve will shift it.
-example: immigration incr/decr (L), more/less education (K/H), more/less mineral deposits (nat resources), production imporvements (techn advances)
Sticky-Wage Theory is…
-if P>P(e) then
wages set by Price expected P(e) so they take a while to adapt.
- then higher revenue, labour cost is lower, so firms increase output and employment.
- higher P causes higher Y = upward slope
Sticky Price Theory is…
Prices sticky in SR b/c menu costs, wait to raise prices, so demand for there increase while cheap, so output and employment increase.
-higher P = higher Y = upward slope
Misperceptions Theory…
changes in P confuse w/ changes in relative P of their product, so if P rises above P(e), believe only rising so incr output + employment.
-higher P + higher Y = upward slope
in the LR P=P(e) b/c
flexible + corrected
