ECONOMICS-AD&AS Flashcards
Why is AD downward sloping?
- wealth effect
- interest rate effect
- international trade effect/ exchange rate effect
Wealth effect
A rise in price level reduces the purchasing power
Interest rate effect
A rise in price level increases demand for money, hence the price of money increases
Exchange rate effect
Demand for export falls
Factors increasing consumption
- disposable income
- money supply
- interest rate
- wealth
- population size
- confidence
- preference from saving to consumption
Factors increasing investment
- interest rate
- corporation tax
- 收益率 rate of return
- business confidence
- advances in technology
Factors increasing net export
- an exchange rate depreciation
- a lower interest rate
- increase in international competitiveness of country’s goods and services
- a fall in imports dueto trade protectionism
- increase in foreign incomes
Why is SRAS upward sloping
- the profit effect
- sticky-price theory
- the misinterpretation effect (misperception)
- the cost effect 了解即可
The profit effect (sticky wage)
Production more profitable, more production
Sticky price theory
A rise in price level leaves some firms with lower prices, promoting sales. (低价不变，sales上升)
The misinterpretation effect (Misperception)
Consider ‘higher prices’ = ‘popular’
Why SRAS decrease
- A price rise of factors of production
- Increase in cost of imported raw materials
- Tax increase on firms
- Reduction in quantity of resources
- Decrease in productivity/ quality of resources
Yn of LRAS is
The potential output/ employment output/ natural rate of unemployment output
Yn is determined by
- quantity of resources
- quality of resources
👉any event that changes either quantity or quality of resources will shift LRAS
Factors (quality) determining LRAS shift
- improved education and training
2. advances in technology
Factors (quantity) determining LRAS shift
- net immigration
- increase in the retirement age
- more women entering the labor force
- net investment
- discovery of new resources
- land reclamation
Effects on SRAS of increase in AD
EXPANSION
SHIFT LEFT
- producing beyond normal output, excess demand for labors
- nominal wages up
Effects on SRAS of decrease in AD
RECESSION
SHIFT RIGHT
- excess supply of labor, nominal wage decreases, supply increases
- back at full employment level of output
Effects on SRAS of an increase in cost
SUPPLY SHOCK
STAGFLATION - output decreases and price level goes up
👉SHIFT LEFT
👉in the long run, low wage = low cost, back to normal
