Chapter 22 Flashcards
Aggregate demand
Quantity of output demanded at each inflation rate
Aggregate Supply
quantity of output supplied by firms at each inflation rate.
four parts for aggregate demand
consumption expenditure
planned investment spending
government purchases
net exports
Y = C + I + G + NX
shifts in aggregate demand
monetary policy r
government purchases G
taxes T
net exports NX
consumption expenditure C
Investment I
Financial frictions f
how does an increase inautonomous monetary policy (r) impact AD curve?
shifts AD left
how does an increase in government purchases impact AD curve?
shifts AD right
how does an increase in taxes impact AD curve?
shifts AD left
how does an increase in net exports impact AD curve?
shifts AD right
how does an increase in consumption expenditure impact AD curve?
shifts AD right
how does an increase in investment impact AD curve?
shifts AD right
how does an increase in financial frictions impact AD curve?
shifts AD left
why is there both SRAS and LRAS
takes time for prices and wages to adjust to long run levels
what determines LRAS?
amount of capital, labor, and technology available
at what point is LRAS vertical?
at the natural rate of output, which occurs when unemployment is at its natural rate
when does LRAS curve shift? (4)
increase in capital
increase in labor supplied
increase in technology available
decline in natural rate of unemployment
why is SRAS upward sloping?
wages and prices are sticky and slow to adjust
firms attempt to take advantage of short run profitability by creating more supply
components of SRAS equation
expected inflation
output gap + sensitivity to ouput gap
inflation shock
output gap formula
aggregate output - potential output
shifts in SRAS
expected inflation
inflation shocks / price shocks
persistent output gap
how does increase in expected inflation shift SRAS?
shifts AD left
how does increase in inflation shock shift SRAS?
shifts AD left
how does increase in persistent output gap shift SRAS?
shifts AD left
keynesian self-correcting mechanism
slow - wages are sticky and there is a need for active government policy
monetarists self-correcting mechanism
rapid - wages and prices are flexible and less need for government intervention
what happens in positive demand shock
AD shifts right
AS shifts left and brings output back to LR equilibrium
inflation is permanently higher
what happens in negative demand shock
AD shifts left
AS shifts right
output at LR equilibrium and inflation is permanently lower
how does a temporary negative supply shock occur?
restriction in supply which results in a rise for prices
what happens with a temporary negative supply shock
AS shifts left
AS shifts back right
back to LR equilibrium
what happens with permanent negative supply shock
LRAS shifts left
AS shifts left
economy in LR equilibrium with output lower and inflation higher
what happens with permanent positive supply shock?
LRAS shifts right
AS shifts right
permanent rise in output and decrease in inflation
A shift in the aggregate demand curve affects output only in the ______ and has no effect on output in the ________.
Short run, long run
a temporary ______ affects output and inflation in the short run and has no effect in the long run
supply shock
how does a permanent supply shock affect output and inflation?
in the short run and the long run
phillips curve
negative relationship between unemployment and inflation
idea behind Phillips curve
when labor markets are tight and unemployment is low, firms have difficulty hiring workers, so they have to raise wages to attract
in turn, they have to raise prices at a more rapid rate when unemployment is low
when is there a trade off between unemployment and inflation?
only in the short run
Okun’s law
negative relationship between unemployment gap and output gap
for every percentage point above potential output, a half percentage point lower in unemployment
