Topic 13- Aggregate Demand and Aggregate Supply Flashcards
What is REAL gdp
holding prices fixed it is a measure in the changes of production
What is an expansion
a period of rising real gdp
1) Total income INCREASING
2) Total Production INCREASING
3) Total employment INCREASING
What is a recession
a period of falling real GDP
Total Production, employment, and incomes are DECREASING
Recession vs depression
two consecutive quarters of negative real gdp
depression: recession happening SEVERELY!!!!!!!!!!!!!!!
What happens to inflation during expansion
HIGHER INFLATION
because more income, more employment, more demand
What happens to inflation during recession
LOW inflation
because less incomes, less employment, less demand
does low inflation mean decreases in price level
not always, but it can mean that!!
USUALLY: slower increases in price level
what happens to employment during a recession
DECLINES!! you will see more of UNemployment rate
What happens to unemployment rate after the end of a recession
unemployment rate= unemployed/labourforce
sometimes it STILL INCREASES BECAUSE:
1) firms dont hire people back fast
2) if labour force grows faster than employment, the unemployment rate higher
-discoruaged workers enter the LBF but unemployed!!
What is the Aggregate Demand Curve
relationship b/w price level and the quantity of goods and services demanded
THIS is equal to the Y in Y=c+i+g+nx
HOLD EVERYTHING ELSE CONSTANT
What causes a movement along the AD curve?
ONLY changes in price level
Why is the AD curve downward sloping
because the y-axis vbl is price level, and AD is equal to Y (GDP= sum of all expenditures)
When price level decrreases, Y (the sum of total expenditures) increases
What is AD curve composed of
C
I
G
NX
Wealth Effect (Changes in C)
Wealth Effect (Changes in C)
What is the Wealthh Effect
Household wealth (cash) GAINS value with lower price level [u can buy more w lower prices]
Household wealth (Cash) LOSES value with higher price level [u can only buy less w higher prices]
If the Price Level goes down how does it impact REAL wealth
REAL WEALTH GOES UP
CONSUMPTION GOES UP
AD GOES UP
How does ‘I’ impact the AD CURVE
the interest rate effect
Interest Rate effect
Lower Price level increases real money supply BECAUSE causes a DECREASE in the interest rate!!!!!!!!!!1
lower int rate= lower cost of borrowing= more borrowing happening= more money supply
higher int rate= higher cost of borrinwg= les sborrowing=less money supply
Which component of AD is immpacted by the real exchange rate effect
NX!
Real exchange rate effect/INTERNATIONAL TRADE EDDECT
lower price level in canada causes exports to rise and imports to fall, SO
lower price level= HIGHER NX!!!!!!
higher price level= LOWER NX!!!
Real exchange rate effect/INTERNATIONAL TRADE EDDECT
lower price level in canada causes exports to rise and imports to fall, SO
lower price level= HIGHER NX!!!!!!
higher price level= LOWER NX!!!W
What is real exchange rate
price of dom goods in terms of foreign goods
e x P/ P *
What 3 effects are the reason why the AD curve is downward sloping
interest rate effect (I)
wealth effect (C)
International trade effect/Real int rate effect (NX)
what causes shifts in the AD curve
-changes in monetary and fiscal policies
-changes in the expectations of households and firms
-changes in foreign vbls
What is monetary policy
actions the central bank takes to manage money supply
changing overnight int rate/ open market op
How does change in monetary policy impact the AD curve
AD curvis is equal to Y=C+I+G+NX
When bank causes interest rates to fall, then more people want loans (MOVES AD CURVE TO RIGHT)
When bank causes interest rates to rise, then less people want loand (MOVES AD CURVE TO LEFT_
What is fiscal policy
changes in federal taxes by govt
How does changes in fiscal policy impact AD curve (govt spending/purchases_
AD curve is Y=C+I+G+NX
When decrease in government spending/purchases, AD left
When increase in government spending/purchases, AD right
How does fiscal policy impact AD curve (taxes)
Lower Personal income tax=increase consumption and investment= SHIFT RIGHT
higher personal income tax= ;pwer consumption and investment= SHIFT LEFT
How does expectations affect AD curve
Households and firms
If expect future to be good, then increases consumption + investment today
How does changes in foreign variables affect AD curve (When value of our dollar rises)
If the growth rate of foreign GDP decreases relative to domestic, then VALUE OF OUR DOLLAR RISES!!!!
This will increase imports!!1 means it will move AD curve to left
How does changes in foreign variables affect AD curve (When value of our dollar FALLS)
when value of our dollar falls, because foreign gdp increases relative to domestic then
THIS WILL INCREASE EXPORTS AS PEOPLE WANNA BUY MORE HERE ISNCE ITS CHEAPER
MOVE AD CURVE TO THE RIGHT
Aggregate Supply
It is upward sloping in the short term
It is vertical in the long term
why is the aggregate supply curve vertical in the long run?
In the long run, level of real GDP (Y) is determined by inputs to production [LKHN] none of these measured on the y axis
In the long run changes in price level do not affect the quantity og goods or services produced
what is the level of real GDP in the long run called
potential GDP
full employment GDP
natural level of output
Natural Level of Output
the production of goods and services that an economy achieves in the long run when unemployment is at its natural rate
Why would LRAS curve shift
any change in the natural level of output
CHANGE IN LABOUR KAPITAL NAT RES OR TECH
Why is SRAS curve upward sloping
as the price level increases the quantity of goods and services firms are willing and able to supply increases
as price of final goods and services rise, prices of inputs rise slower!!
Sticky Wage Theory
if the price level turns out to be HIGHER than expected & costs of production are constant, then firms will EXPAND! increasing REAL GDP
if the prive level turns out to be Lower than expected & costs of production are constant, then firms will CONTRACT, decreasing REAL GDP
what is a stick ywag
when wages do not respond quickly to changes in demand or supply
how can a wage be sticky
beacuse of contracts (i.e. unions can make wages be fixed by contract for several years)
STICKY PRICE THEORY
the costs to firms of changing prices are MENU costs (expensive bc printing new menus/catalogues)
menu costs make some prices stick to where they are at and not responsive!!!
why does sticky price theory actually help firms
i.e. when price level is higher than expected
some firms do not wanna increase prices bc of menu costs (Extra expense) so they will KEEP old prices
prices stay the same, then more people wanna buy the cheaper good, more produced ,more employed
why does sticky price theory actually HURT firms
i.e. when price level is lower than expected
some firms may NOt adjust prices down to avoid menu costs (ADDED EXPENSE)
this higher price means sales decrease, and then productiona nd employment decrease
what factors can shift the SRAS
levels of input to production: lbaour, capital, nat res, tech
and the EXPECTED PRICE LEVEL!!!!!!!!!!!!!!!!!!!!!!! (THIS will influence what prices are stuck, wages are stuck, and perceptions about relative prices)
As fop increase, what happens to SRAS curve
move to the right!
AS fop decrease what happens to sras curve
move to the left
As tech increases what happens to sras curve
shift to the right
If firms expect price level to increase in the future
THE SRAS CURVE SHIFT LEFT to reflect the expected cost increase
if workers and firms are ADJUSTING to the price level being lower than expected, how does SRAS move
TO THE RIGHT!
if workers and firms adjusting to the price level being higher than expected, how does SRAS move
to the left
supply shock
unexpected event that causes sras curve to shift
unexpected input price decreases (supply shock) impact on sras
shift right
unexpected input price increases (supply shock) impact on sras
shift left
in supply and demand questions of aggregate demand, where doe sthe economy begin
with LRAS in the middle, and SRAS and AD intersecting when they are directly on top of the LRAS curve!!
where is longrun macroeconomic equilbrium found?
ALOGN THE LRAS CURVE!!!!!!
How to determine effects on macroeconomic equilibrium?
1) which curve is moving? AD curve or AS curve
2) which way does the relevant curve shift?
3) what happens to the equilbrium in the short run and long run equilibrium?
What happens inthese macroecoomic equilbriuum problems?
(when something is not impacting LRAS curve)
either AD curve shift or AS curve shifts
the other curve shifts to compensate
and equilbrium is found along the LRAS curve!!!!!!!
what happens in these macroecnomic equilibrium problems when something is impacting the LRAS curve?
either AD curve shifts or AS curve shifts
the LRAS curve moves to compensates and changes the capticty of the economy to produce in the long run
The short-run aggregate supply curve slopes upward because wages
and prices are sticky and workers and firms fail to predict accurately
the future price level
The short-run aggregate supply curve slopes upward because wages
and prices are sticky and workers and firms fail to predict accurately
the future price level
In short-run macroeconomic equilibrium, the aggregate demand and
short-run aggregate supply curves often intersect at a point off the
long-run aggregate supply curve
In short-run macroeconomic equilibrium, the aggregate demand and
short-run aggregate supply curves often intersect at a point off the
long-run aggregate supply curve
IN long run economic equilbriumg
AD and AS intersect at a point on the LRAS curve
If short-run equilibrium occurs at a point beyond potential GDP,
wages and prices rise, and the short-run aggregate supply curve shifts
to the left until potential GDP is restored
If short-run equilibrium occurs at a point beyond potential GDP,
wages and prices rise, and the short-run aggregate supply curve shifts
to the left until potential GDP is restored
long run equilbrium ofund along
the LRAS curve!
short run equilbrium found along
not always the LRAS CURVE
