Chapter 5 Flashcards
Aggregate demand and supply,
What is supply in the Keynesian curve? (long run or short run, horizontal of vertical, what defines firms supply?)
- Short run
- Horizontal
- Firms will supply whatever amount at the given price level
What is supply in the Keynesian curve? (long run or short run, horizontal of vertical, what defines firms supply, full employment?)
- Long run
- Vertical
- The same amount of a good will be supplied regardless of the price
- Labour is fully employed so output is at its potential level
What three types of unemployment contribute to the natural unemployment rate?
- Frictional
- Structural
- Real wage unemployment
What is the approximate rate of natural unemployment in Canada?
5.5-6.5%
What do expansionary policies do to aggregate demand?
shift the demand curve to the right
What is the real money supply?
value of money provided by the central bank and the banking system
What is the velocity of money
The number of times it turns over in a year
What happens to price level if output is above its potential?
it increases and is higher next period
What happens to price level if output is below its potential?
price falls, and is lower next period
What controls the speed of the the price adjustment system? When does the mechanism work quickly?
Controlled by ƛ, the larger the ƛ the faster the economy returns to potential output
In the Keynesian model, what does a shift to the right of AD do?
increases output but leaves the equilibrium price level unchanged
In the Classical model, what does a shift to the right of AD do?
increases the equilibrium price level but leaves output unchanged
What are three thing supply side policies can be used to do?
- removing unnecessary regulation
- Maintaining an efficient legal system
- Encouraging technological progress
What can only supply side policy do?
permanently increase output
Over long period what is the sole determinant of output?
aggregate supply