unit 3 Flashcards
When unemployment rate < natural rate of unemployment…
inflation
when unemployment rate > natural rate of unemployment…
recession
What happens in long run: inflation
In the long run, wages + input prices are flexible, so input prices + wages rise, increasing production costs (SRAS shifts left back to LRAS)
What happens in long run: recession
In the long run, wages + input prices are flexible, so input prices + wages fall, decreasing production costs (SRAS shifts right, back to LRAS)
why is the SRAS upward sloped?
bc of fixed input costs (sticky wages)
interest rate
how high the cost of borrowing is
spending multiplier
1/MPS
tax multiplier
-MPC/MPS OR spending multiplier - 1
to fix inflation…
contractionary fiscal policy –> govt. spending decreases, taxes increases
to fix recession…
expansionary fiscal policy –> govt. spending increases, taxes decreases
stagflation
worse case scenario: prices rise, economic growth (rate of increase in output) slumps, high unemployment
MPC =
change in consumption / change in income
if LRAS descreases…
PPC shifts inward
if LRAS increases…
PPC shifts outward
