Module 14.3: Macroeconomic Equilibrium and Growth Flashcards
What does a decrease in aggregate demand do to real output and the price level in the short run?
What does the new short run equilibrium output compare to full employment GDP? What is this called?
it will reduce both real output and the price level.
GDP will now be lower than full employment GDP. This is called a recessionary gap.
What do classical and keynesian economists believe would happen during a recessionary gap?
classical - unemployment would drive down wages and in turn would increase short run aggregate supply and return the economy to full employment GDP.
Keynesian - aggregate demand must be increased by government intervention.
what does a increase in aggregate demand do to a real output and the price level in the short run?
What does the new short run equillibrium output compare to full employment GDP? What is it this called?
Increases output and prices.
GDP will now be higher than full employment GDP. This is called an inflationary gap.
What brings back the GDP to full employment during an inflationary gap?
competition on workers, raw materials, and energy may shift the SRAS curve to the left. Alternatively government policy makers can reduce aggregate demand by decreasing gov spending.
What is stagflation?
when the new short run equilibrium is at lower GDP and a higher overall price level for goods and services.
Explain what happens to GDP and price when AD and AS both increase?
real GDP increases but the effect on the price level depends on the relative magnitudes of the changes because their price effects are in opposite directions.
What happens to GDP and price when AD and AS increase?
real GDP increases, but price depends on the magnitude
What happens to GDP and price when AD and AS decrease?
real GDP decreases, but price depends on the magnitude
What happens to GDP and price when AD increases and AS decreases?
price level will increase, but real GDP will depend on the magnitude
What happens to GDP and price when AD decreases and AD increases?
price level will decrease, but real GDP will depend on the magnitude
What are the five important sources of economic growth?
1) Labor Supply (labor force)
2) Human Capital
3) Physical capital stock
4) Technology
5) Natural resources
What is the formula for growth in potential GDP?
growth in labor force + growth in labor productivity
What is the formula for the production function?
Y = A * f * (L, K)
Y = aggregate economic output
L = size of labor force
K = amount of capital available
A - Total factor productivity
What is the total factor productivity?
quantified the amount of output growth that is not explained by increases in the size of the labor force and capital. Closely related to technological advances.
How can you structure the production function on a per-worker basis?
Y / L = A x f * (K / L)
Y / L = output per worker
K / L = physical capital per worker
