Chapter 22: AD and AS Analysis Flashcards
Four components of AD
- consumption expenditure
- planned investment spending
- government purchases
- net exports
AD curve
Y_AD = C + I + G + NX
demand shocks
things that can shift the AD curve
7 demand shocks
- autonomous monetary policy, shift left
- government purchases, shift right
- taxes, shift left
- autonomous net exports, shift right
- autonomous investment, shift, right
- financial frictions, shift left
AS curve
the relationship between the quantity of output supplied and the inflation rate
natural rate of unemployment
the rate at which the economy gravitates in the LR
natural rate of output/potential output
the level of aggregate output produced at the natural rate of unemployment
SR AS curve shifts
- expectation of inflation
- the output gap
- inflation
output gap
percentage difference between aggregate output and potential output
output and inflation
When Y > Y_P (Y-Y_P > 0), inflation rises
supply shocks
when there are shocks to the supply of goods/services in an economy that translates into inflation shocks
inflation shocks
shifts in inflation that are independent of the amount of slack in the economy or expected inflation
cost-push shocks
when workers push for wages higher than productivity gains which drives up costs and inflation
SR AS curve equation
inflation = expected inflation + sensitivity of inflation * (Y - Y_P) + inflation shock
shifts in LR AS Curve
- total amount of capital in economy, shift right
- total amount of labor supplied in economy, shift right
- available tech that puts labor and capital together to produce goods/services, shift right
i.e. people, factories, and technology
general equilibrium
the point where all markets are in equilibrium and the quantity of aggregate output demanded equals the quantity of aggregate output supplied
self correcting mechanism
regardless of where output is initially, it returns eventually to potential output
Demand shocks in SR and LR
SR: rightward shift, rise inflation and output
LR: only rise in inflation
positive supply shock
increase in supply
stagflation
rising inflation but falling level of aggregate output
Temporary Supply shocks in SR and LR
SR: temporary positive supply shock, shift down, inflation falls and output rises
LR: output and inflation are unchange
real business cycle theory
aggregate economic fluctuations are shocks in taste and tech and are driving forces behind SR fluctuations
Permanent supply shock in SR and LR
SR: permanent negative supply shock, decline in output and rise in inflation
LR: permanent decline in output and permanent rise in inflation
AD and AS Conclusions
- economy has self correcting mechanism that returns it to potential output and natural rate of unemployment
- shift in AD curve affects output in SR
- temp. supply shock affects output and inflation in SR
- permanent supply shock affects output and inflation in SR and LR
LRAS Curve
denotes the amount of output that can be produced by an economy in the LR
Factors of potential output
- amount of capital in the economy
- total amount of labor supplied at full employment
- available technology that puts labor and capital together to produce goods and services
LRAS vs SRAS
how long it takes to renegotiate wages
- as wages get renegotiated more often, the closer SRAS curve becomes the LRAS curve
what are factors of potential output in the long run?
- number of workers
- stocks
- technology
(price level not included)
positive output gap (Y - Yp > 0)
- little slack in economy and labor gets tight
- workers demand for higher wages
- firms increase prices
- higher inflation
negative output gap (Y - Yp < 0)
- lots of slack in economy and workers accept smaller increases in wages
- firms lower prices to sell goods
- lower inflation
influences in today’s inflation
- rising $ which decreases price of imported goods
- synchronous global economic slow down
- fall in oil prices
- rising commodity prices
- rising unit labor costs
- SRAS shifts up
shifts in AS from expected inflation
- rise in expected inflation, AS shifts left
- fall in expected inflation, AS shifts right
shifts in AS from inflation shock
- favorable supply shock, AS shifts right
- unfavorable supply shock, AS shifts left
shifts in persistent output gap
- (Y - Yp) > 0, AS shifts left
- (Y - Yp) < 0, AS shifts right
