Macro Unit Two Flashcards
Aggregate demand curve
A curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level
Real interest rate effect
A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded
When price falls, C increases, more money to spend, invest, interest rates down, GDP up, I up
Wealth effect
A decrease in ten price level makes consumers wealthier, which encourages them to spend more. The increase in consumer spending in means a larger quantity of goods and services demanded
Price down, q up, C up, GDP up
Net export effect
When a fall in the US price level causes US interest rates to fall, the real exchange rate depreciates, and this depreciation stimulates US net exports and thereby increases the quantity of goods and services demanded
I up, US money down, net exports up (short run/nominal), GDP up
What will shift AD curve
Any event that changes how much people want to consume at a given price level, ex taxes Any event that changes how much firms want to invest at a given price level Government purchases (reduce/buy more) Any event that changes net exports for a given price level, ex exchange rates
Recession
Two consecutive quarters of declining real output (real GDP)
Accompanied by:
-declining real incomes
-rising unemployment
Depression
A very severe, long recession
The business cycle
Growth trend, recoveries and peaks
Recovery is expansion of GDP
Recession is contraction of GDP
Y axis
Price level
Measures the value of money (inflation)
X axis
Output (real GDP)
Measures the quantity of goods produced
When output falls, unemployment rises
Aggregate demand curve
A curve that shows what all sectors want to buy at each price level aka
A curve that shows how GDP varies with price level
Aggregate demand
As price level falls, households, businesses, government, and foreigners increase their consumption
Aggregate supply curve
A curve that shows the amount of goods and services all sectors are willing to supply at each level of prices
Classical economy theory
Prices and wages are flexible
They will always adjust ensuring that everything is always purchased
Demand is not an issue
Assumes that the economy is fully utilizing its resources
Long run
Long run aggregate supply curve
In notes, completely vertical
Why is aggregate supply curve vertical in long run
An economy’s production (GDP) and growth are dependent on its availability of land, labor, and capital, and it’s ability to use those resources to create goods
It is not dependent on the price level
It is fixed at a level of full employment of resources
LRAS
LRAS is fixed on the x acid where the economy is at:
Full employment (5% unemployment)
Max potential output (GDP)
Things that shift the LRAS curve
Increase/decrease in resources/factors of production
Change in technology
Anything that would shift a PPF curve
Fill out table from notes about differences in LRAS and SRAS
K
Keynesian theory (aka the general theory 1936)
Keynesian theory suggests that say’s law does not always hold true
Demand is key (called underconsumption)
People save extra during bad times
Not all resources are always used during a recession
Wages and prices are fixed or sticky in the short run
An increase in price level will result in an increase in the amount of output supplied by an economy and vice versa
Short run aggregate supply curve
Upward sloping, in notes
Things that will shift the SRAS curve
Anything that shifts the LRAS curve
Expectations about price
An increase in the expected price level shifts the SRAS to the left
A decrease in the expected price level shifts the SRAS to the right
An economy at equilibrium
LRAS, SRAS, and aggregate demand all intersect Also known as at full employment Y represents -max GDP -5% unemployment -Max income
Real GDP
Real GDP can only increase when an economy produces more output (goods and services)
Nominal GDP can increase with an increase in price level
Showing a recession using the AD/AS model
Short run AS and AD must intersect below the full employment level of output/natural rate of unemployment
AD intersects AS before it intersects LRAS going from left to right
Business cycle step one
AD shifts left
Could be caused by terrorist attack, bubble burst, housing market collapse, dot com collapse, bank failures
Business cycle step two
Real prices and real GDP fall
The economy is now not producing at max potential output
AD and SRAS intersect before SRAS and LRAS intersect
Business cycle step three
Over time AS shifts to the right
People expect the price level to be lower (which shifts AS right)
Business cycle step four
The economy returns to equilibrium in the long run
Output remains at full employment in the long run
The price level has fallen
Stagflation
Falling output and rising prices Stagnant growth and inflation Twin evils No automatic fix AS has shifted left
Inflationary gap
The economy is operating beyond the full employment level of output
Unemployment is below the natural rate
Resources are working overtime
The inflation will eventually cause a leftward shift in SRAS
AS and AD intersect after SRAS and LRAS intersect
Economic growth
A long run sustained increase in real GDP
Developed countries aim for 2-3% growth per year
Productivity
The quantity of goods and services produced per worker
Determines a nation’s potential
Things that can increase a worker’s productivity
Increases in:
- capital goods (capital stock)
- human capital (the skill level of laborers)
- natural resources
- technological knowledge
Increase in productivity
Any increase in productivity shifts the LRAS curve to the right
This displays economic growth
Catch up effect
Poor countries tend to grow more rapidly than rich countries
Due to the diminishing returns of adding new capital stock
