National Income & Price Determination Flashcards
Aggregate Demand
Shifts in Aggregate Demand (3)
total basket of goods demanded
changes in expectations (about economy)
changes in wealth
Size of existing stock of physical capital
Differences (3) between SRAS & LRAS
sras has a tradeoff with inflation and unemployment (Lras doesn’t)
flexibly/fixed inputs
price level affects output/maximum output is reached
Aggregate Supply
Short Run Aggregate Supply Curve
Sticky Wage vs. Nominal Wage
opposite of sticky wage?
total basket of goods supplied
relationship b/w aggregate price level and quantity of output existing in the short run
doesn’t change with the economy
money paid to employees (set by contracts)
flexible
Short Run
Shifts in Short Run Aggregate Supply (4)
period when production costs are fixed
changes in…
commodity prices (input)
nominal wages
productivity
expectations about inflation
Long Run Aggregate Supply Curve
Long Run
relationship b/w aggregate price level and quantity of output existing in the long run
production costs are flexible
Shifts in Long Run Aggregate Supply (3)
Potential Output
Full Employment
increase in quantity + quality of resources
technological progress
level of real gdp an economy produces when all prices = flexible
level of real gdp an economy produces when all resources = fully employed
Multiplier
MPC, MPS
economic factors changing and causing change in the economy
marginal propensity to consume: % of new income someone spends
marginal propensity to save: % of new income someone saves
Demand-Pull Inflation (4 causes)
def. AKA
prices respond to supply shortage
limited supply
economic growth (more $)
gov’t spending
increase in exports
inflation expectations
Cost-Push Inflation (3 causes)
def. AKA
increases?
supply issue resulting in high prices
increased cost for input goods
cost of raw materials, wages + labor
natural hazards affect production
changes in gov’t regulations
Expansionary Policy
ex: 2
used when?
Contractionary Policy
ex: 2
used when?
fiscal policy increasing aggregate demand
increase gov’t purchases/transfers
cut taxes
recession
fiscal policy reducing aggregate demand
reduce gov’t purchases/transfers
increase taxes
high inflation
Keynesian Economics
if there isn’t enough demand?
Supply Side Economics
aka?
if there isn’t enough demand?
gov’t should create demand for goods
reduce taxes, increase gov’t spend.
laws of supply + demand control market (laissez-faire)
reduce taxes to increase purchasing power and jobs
Demand Shock
positive? negative?
Supply Shock
positive? negative?
anything that shifts the AD curve
increase in aggregate demand, output, and employment
(opposite)
anything that shifts the supply curve
increase in aggregate supply, output, and employment
(opposite)
Recessionary Gap
effect on economy?
Inflationary Gap
aka?
effect on economy?
how to set back to equilibrium?
the economy is below full employment
demand and prices decrease
demand is more than supply
production is too high
demand and prices increase
increase nominal wages
Wealth Effect
Interest Rate Effect
Exchange Rate Effect
for both inverse is true
aggregate price level changes, affecting the purchasing power ofconsumers
Interest rates increase → reduces investment spending because cost of borrowing is higher
Price level increases in U.S.
Exports are expensive for foreign buyers
Imports are cheap for Americans
Graph
Aggregate Demand
AD/AS Equilibrium
downward sloping
equilibrium price level (Pe)
equilibrium output (Ye)
equilibrium point (Esr)
