Macro Unit Two Flashcards

1
Q

Aggregate demand curve

A

A curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level

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2
Q

Real interest rate effect

A

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

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3
Q

Wealth effect

A

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

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4
Q

Net export effect

A

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

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5
Q

What will shift AD curve

A
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
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6
Q

Recession

A

Two consecutive quarters of declining real output (real GDP)
Accompanied by:
-declining real incomes
-rising unemployment

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7
Q

Depression

A

A very severe, long recession

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8
Q

The business cycle

A

Growth trend, recoveries and peaks
Recovery is expansion of GDP
Recession is contraction of GDP

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9
Q

Y axis

A

Price level

Measures the value of money (inflation)

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10
Q

X axis

A

Output (real GDP)
Measures the quantity of goods produced
When output falls, unemployment rises

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11
Q

Aggregate demand curve

A

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

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12
Q

Aggregate demand

A

As price level falls, households, businesses, government, and foreigners increase their consumption

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13
Q

Aggregate supply curve

A

A curve that shows the amount of goods and services all sectors are willing to supply at each level of prices

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14
Q

Classical economy theory

A

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

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15
Q

Long run aggregate supply curve

A

In notes, completely vertical

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16
Q

Why is aggregate supply curve vertical in long run

A

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

17
Q

LRAS

A

LRAS is fixed on the x acid where the economy is at:
Full employment (5% unemployment)
Max potential output (GDP)

18
Q

Things that shift the LRAS curve

A

Increase/decrease in resources/factors of production
Change in technology
Anything that would shift a PPF curve

19
Q

Fill out table from notes about differences in LRAS and SRAS

20
Q

Keynesian theory (aka the general theory 1936)

A

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

21
Q

Short run aggregate supply curve

A

Upward sloping, in notes

22
Q

Things that will shift the SRAS curve

A

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

23
Q

An economy at equilibrium

A
LRAS, SRAS, and aggregate demand all intersect
Also known as at full employment
Y represents
-max GDP
-5% unemployment
-Max income
24
Q

Real GDP

A

Real GDP can only increase when an economy produces more output (goods and services)
Nominal GDP can increase with an increase in price level

25
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
26
Business cycle step one
AD shifts left | Could be caused by terrorist attack, bubble burst, housing market collapse, dot com collapse, bank failures
27
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
28
Business cycle step three
Over time AS shifts to the right | People expect the price level to be lower (which shifts AS right)
29
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
30
Stagflation
``` Falling output and rising prices Stagnant growth and inflation Twin evils No automatic fix AS has shifted left ```
31
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
32
Economic growth
A long run sustained increase in real GDP | Developed countries aim for 2-3% growth per year
33
Productivity
The quantity of goods and services produced per worker | Determines a nation's potential
34
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
35
Increase in productivity
Any increase in productivity shifts the LRAS curve to the right This displays economic growth
36
Catch up effect
Poor countries tend to grow more rapidly than rich countries | Due to the diminishing returns of adding new capital stock