exam review Flashcards
what shifts the aggregate demand curve?
why is there a long-run and short-run supply? how do they look on the model?
short run reflects nominal (not affected by prices) and the long run reflects real variables (affected by prices)
neutrality of money
what shifts the LRAS curve?
why is the short run aggregate supply curve upward sloping?
as prices increase, production increases
what is the theory of sticky wages and sticky prices?
multi-year contracts do not update if inflation changes (ex. sticky wage = salary, sticky prices = menu prices)
How does a stock market crash affect the AD and AS model?
AD shifts left = price and output is lower
at point B, there is an imbalance because we expect inflation to be higher
after expectations for inflation adjust the AS curve overtime, sras increases to meet LRAS
how can stability be restored after an imbalance?
government can bring us back from point B to point A in the short run through govt policies
1. monetary policy - controlled by fed
2. fiscal policy - govt controls AD
what is the theory of liquidity preferance ?
money demand reflects how much wealth people want to hold in liquid form
how does the interest-rate effect work?
why is the money supply curve a straight line?
because it is controlled by the fed, they determine how much money is in circulation
what are the effects of reducing the money supply?
how does fiscal policy affect aggregate demand?
expansionary
contractionary
effect:
- multiplier effect:
- crowding-out effect
how does the crowding-out effect work?
Phillips curve
