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ECON 203 > Topic 13- Aggregate Demand and Aggregate Supply > Flashcards

Topic 13- Aggregate Demand and Aggregate Supply Flashcards

1
Q

What is REAL gdp

A

holding prices fixed it is a measure in the changes of production

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2
Q

What is an expansion

A

a period of rising real gdp

1) Total income INCREASING
2) Total Production INCREASING
3) Total employment INCREASING

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3
Q

What is a recession

A

a period of falling real GDP

Total Production, employment, and incomes are DECREASING

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4
Q

Recession vs depression

A

two consecutive quarters of negative real gdp

depression: recession happening SEVERELY!!!!!!!!!!!!!!!

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5
Q

What happens to inflation during expansion

A

HIGHER INFLATION

because more income, more employment, more demand

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6
Q

What happens to inflation during recession

A

LOW inflation

because less incomes, less employment, less demand

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7
Q

does low inflation mean decreases in price level

A

not always, but it can mean that!!

USUALLY: slower increases in price level

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8
Q

what happens to employment during a recession

A

DECLINES!! you will see more of UNemployment rate

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9
Q

What happens to unemployment rate after the end of a recession

unemployment rate= unemployed/labourforce

A

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!!

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10
Q

What is the Aggregate Demand Curve

A

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

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11
Q

What causes a movement along the AD curve?

A

ONLY changes in price level

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12
Q

Why is the AD curve downward sloping

A

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

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13
Q

What is AD curve composed of

A

C

I

G

NX

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14
Q

Wealth Effect (Changes in C)

A

Wealth Effect (Changes in C)

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15
Q

What is the Wealthh Effect

A

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]

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16
Q

If the Price Level goes down how does it impact REAL wealth

A

REAL WEALTH GOES UP

CONSUMPTION GOES UP

AD GOES UP

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17
Q

How does ā€˜Iā€™ impact the AD CURVE

A

the interest rate effect

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18
Q

Interest Rate effect

A

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

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19
Q

Which component of AD is immpacted by the real exchange rate effect

A

NX!

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20
Q

Real exchange rate effect/INTERNATIONAL TRADE EDDECT

A

lower price level in canada causes exports to rise and imports to fall, SO

lower price level= HIGHER NX!!!!!!

higher price level= LOWER NX!!!

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21
Q

Real exchange rate effect/INTERNATIONAL TRADE EDDECT

A

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

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22
Q

What is real exchange rate

A

price of dom goods in terms of foreign goods

e x P/ P *

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23
Q

What 3 effects are the reason why the AD curve is downward sloping

A

interest rate effect (I)
wealth effect (C)
International trade effect/Real int rate effect (NX)

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24
Q

what causes shifts in the AD curve

A

-changes in monetary and fiscal policies
-changes in the expectations of households and firms
-changes in foreign vbls

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25
What is monetary policy
actions the central bank takes to manage money supply changing overnight int rate/ open market op
26
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_
27
What is fiscal policy
changes in federal taxes by govt
28
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
29
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
30
How does expectations affect AD curve Households and firms
If expect future to be good, then increases consumption + investment today
31
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
32
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
33
Aggregate Supply
It is upward sloping in the short term It is vertical in the long term
34
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
35
what is the level of real GDP in the long run called
potential GDP full employment GDP natural level of output
36
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
37
Why would LRAS curve shift
any change in the natural level of output CHANGE IN LABOUR KAPITAL NAT RES OR TECH
38
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!!
39
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
40
what is a stick ywag
when wages do not respond quickly to changes in demand or supply
41
how can a wage be sticky
beacuse of contracts (i.e. unions can make wages be fixed by contract for several years)
42
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!!!
43
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
44
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
45
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)
46
As fop increase, what happens to SRAS curve
move to the right!
47
AS fop decrease what happens to sras curve
move to the left
48
As tech increases what happens to sras curve
shift to the right
49
If firms expect price level to increase in the future
THE SRAS CURVE SHIFT LEFT to reflect the expected cost increase
50
if workers and firms are ADJUSTING to the price level being lower than expected, how does SRAS move
TO THE RIGHT!
51
if workers and firms adjusting to the price level being higher than expected, how does SRAS move
to the left
52
supply shock
unexpected event that causes sras curve to shift
53
unexpected input price decreases (supply shock) impact on sras
shift right
54
unexpected input price increases (supply shock) impact on sras
shift left
55
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!!
56
where is longrun macroeconomic equilbrium found?
ALOGN THE LRAS CURVE!!!!!!
57
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?
58
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!!!!!!!
59
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
60
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
61
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
62
IN long run economic equilbriumg
AD and AS intersect at a point on the LRAS curve
63
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
64
long run equilbrium ofund along
the LRAS curve!
65
short run equilbrium found along
not always the LRAS CURVE

ECON 203 (16 decks)

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