Test Flashcards
Why are price levels fixed in short run?
Works don’t have time to realize that inflation has lowered their real wages
In the long run nominal wages ___ as prices change
Change
Why do nominal wages change in the long run?
Works realize that their real wages have decreased and they request wages
What are nominal wages?
The current level of wage s
What are real wages?
Wages that are adjusted for inflation
What are 3 assumptions regarding the SRAS curve?
Initial price level is P1
Nominal wages are fixed
Price level can move up or down
Why is the SRAS curve positively sloped?
Nominal wages stay constant as prices change
LRAS refers to what type of wages?
Real wages
Why is the LRAS curve vertically sloped?
Nominal wages change proportionally to change in prices
What is the economy always seeking?
Full employment
What happens in the LRAS?
Everything eventually returns to equilibrium
In the short run, demand pull inflation does what
Drives up prices and increased output
In the long run demand pull inflation does what?
It raises prices
What is stagflation??
High unemployment rate while also experiencing recession
Cost push inflation is also called?
Stagflation
When does cost push inflation occur?
When the SRAS curve shifts left from equilibrium
What happens when the government tries to counter cost push inflation?
It causes prices to rise even more
If the government leaves the cost push inflation alone what happens?
Nominal shares fall and AS shifts back to equilibrium
When does a recession occur?
AD shift leftward
What does the Phillips curve illustrate?
The relationship between inflation and unemployment
What is the relationship between inflation and unemployment?
Inverse
High inflation=
Low employment
Low inflation=
High unemployment
What could explain what cause cost push inflation?
Aggregate supply shocks by oil
