Final Exam Flashcards
Why Do Bubbles Happen
When people buy assets for no reason other than that they think the price will go up.
Define Aggregate Demand Curve
Shows the relationship between the overall price level and the level of total demand in the economy.
Define The Wealth Effect
When people are less wealthy, they reduce their consumption.
A negative relationship between the overall price level and consumption spending.
Relationship Between Prices (Price Level) And The Interest Rate
When prices rise, the interest rate also tends to rise.
The increased borrowing costs create an indirect negative relationship between the price level and investment spending.
Relationship Between Price Level And Government Spending
Much of government spending is independent of the price level.
Relationship Between Price Level And Net Exports
When price level increases, net exports should decrease.
Negative relationship between price level and net exports.
Graphing Changes In The Price Level (Price Increase And What Causes A Shift)
A price increase is represented by a downward shift of the planned aggregate expenditure line
Anything other than a change in the price level itself that leads to a different equilibrium in the aggregate expenditure model will cause the aggregate demand curve to shift.
Consumption - What Causes The Aggregate Demand Curve To Shift (Increase (right), Decrease (left))
Increase (shift right): high expectations about future income, tax cuts.
Decrease (shift left): low expectations about future income, higher interest rates.
Investment - What Causes The Aggregate Demand Curve To Shift (Increase (right), Decrease (left))
Increase (shift right): confidence in the future economy, tax credit for businesses.
Decrease (shift left): recessions, taxes on capital increase, higher interest rates.
Government Spending - What Causes The Aggregate Demand Curve To Shift (Increase (right), Decrease (left))
Increase (shift right): increased government spending spurs spending during a recession.
Decrease (shift left): decreased government spending in response to concerns about increasing debt leads to less spending.
Net Exports - What Causes The Aggregate Demand Curve To Shift (Increase (right), Decrease (left))
Increase (shift right): new free trade agreement, economic growth abroad (increases demand for Canadian goods).
Decrease (shift left): other countries increase their tariffs, the dollar strengthens making domestic goods more expensive for international consumers.
Expenditure Multiplier Formula And Finding Stimulus Spending
Expenditure Multiplier = 1/(1-b)
b is the Marginal Propensity to Consume
(amount of put in by government) (expenditure multiplier) = money that will be spent
Aggregate Supply Curve vs Market Supply Curve
Aggregate supply curve: production in the economy as a whole, difference between short run and long run.
What Does Long Run Imply
It is however long it takes for prices of inputs to fully adjust to changes in economic conditions.
Define Business Cycle (define, boom, bust/recession)
Fluctuations around the level of potential output.
Boom: when output is higher than potential output
Bust/recession: output is below potential output
How Are Economic Booms Possible (short run) And How They Return (long run)
Short run: Production can be expanded beyond long run potential by pressing all of the factors of production beyond their normal capacity.
Long run: Intense demand for labour and capital when an economy is operating above capacity will drive prices upward.
Define Supply Shocks
Significant events that directly affect production, can be positive or negative.
What Shifts The Long Run Supply Curve (right, left)
Right: if the potential output of the economy expands.
Left: if the economy loses productive capacity.
Technology - What Causes The Long Run Aggregate Supply Curve To Shift (Increase (right), Decrease (left))
Increases: innovation allows for greater production using the same amount of inputs.
Decreases: reduction in incentive to innovate.
Capital - What Causes The Long Run Aggregate Supply Curve To Shift (Increase (right), Decrease (left))
Increases: foreign investment in factories and machines increases available capital.
Decreases: depreciation and wear break down capital.
Labour - What Causes The Long Run Aggregate Supply Curve To Shift (Increase (right), Decrease (left))
Increases: immigration increases the available supply of labour.
Decreases: aging population takes workers out of the labour force.
Education - What Causes The Long Run Aggregate Supply Curve To Shift (Increase (right), Decrease (left))
Increases: universal primary education gives everyone a chance to go to school.
Decreases: reduction of federal university grants.
Natural Resources - What Causes The Long Run Aggregate Supply Curve To Shift (Increase (right), Decrease (left))
Increases: new energy sources allow factories to produce more with the same inputs.
Decreases: climate change permanently reduces the amount of land that can be farmed.
Do The LRAS And SRAS Always Shift Together?
No
Everything that shifts LRAS shifts SRAS but not the other way around.
The only things that can shift LRAS is factors that affect how we produce.