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Macroeconomics > WEEK 4 > Flashcards

WEEK 4 Flashcards

1
Q

aggregate demand curve

A

relationship between aggregate price level and the quantity of aggregate output demanded by households, businesses, government and the rest of the world

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2
Q

why does AD slope downwards?

A
  • wealth effect: a higher APL reduces the purchasing power of households’ wealth and reduces consumer spending
  • IR effect: a higher APL makes households hold more money and leads to a rise in IR (and a fall in investment and consumers spending)
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3
Q

how to tell if something causes a shift or a movement in AD?

A
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4
Q

How do these shift AD?

  1. interest rates increase
  2. income tax rates increase
  3. government expenditure increase
  4. consumer confidence improves
  5. business confidence improves
  6. expectation of future inflation
  7. expectation of future increased income/wealth
  8. expectation of future increased revenue/profit
  9. increase in foreign RGDP
  10. appreciation in value of domestic currency
  11. increase in foreign inflation rate
A
  1. left
  2. left
  3. right
  4. right
  5. right
  6. right
  7. right
  8. right
  9. left
  10. left
  11. right
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6
Q

How do these shift SR/LR AS?

  1. increase spending on education/training
  2. increase spending on capital spending
  3. increase spending on infrastructure
  4. decrease spending on research/development
  5. increase taxes on business earnings
  6. strengthen competition/anti-monopoly
  7. privatise state-owned assets
  8. strengthen union power
  9. decrease minimum wage
  10. increase transfer payments
  11. decrease training schemes
  12. increase marginal tax rate
  13. decrease capital gains tax
  14. weaken environment laws
  15. strengthen health/safety laws
  16. increase productivity
  17. increase wages
  18. increase cost of labor
  19. decrease cost of raw materials
  20. increase capital stock
  21. decrease cost of imported factors of production
  22. improvements in technology
  23. increase in budget deficit (crowding out)
A
  1. right (LR/SR)
  2. right (LR/SR)
  3. right (LR/SR)
  4. left (LR/SR)
  5. left (SR)
  6. right (SR)
  7. right (SR)
  8. left (SR)
  9. right (SR)
  10. left (SR)
  11. left (LR/SR)
  12. left (SR)
  13. right (SR)
  14. right (SR)
  15. left (SR)
  16. right (LR/SR)
  17. left (SR)
  18. left (SR)
  19. right (SR)
  20. right (LR/SR)
  21. right (SR)
  22. right (LR/SR)
  23. left (SR)
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7
Q

aggregate supply curve

A

relationship between the APL and the quantity of aggregate output firms are willing to provide

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8
Q

nominal wage

A

dollar amount of wage paid

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9
Q

sticky wages

A
  • nominal wages are slow to fall evenin in the face of high unemployment and slow to rise even in the face of labor shortages
  • because nominal wages are determined by contracts signed a while ago
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10
Q

what does a higher APL lead to in short run for businesses?

A
  • profit per unit = price per unit - production cost per unit
  • fixed production cost per unit because wages determined by contracts signed a while ago
  • leads to higher profits and increased aggregate output in the short run
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11
Q

long run aggregate supply curve

A

relationship between APL and quantity of aggregate output supplied that would exist if all prices (inc. nominal wage) were fully flexible

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12
Q

long run

A

time it takes for all prices (inc. nominal wages) to adjust

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13
Q

potential output

A

level of real GDP the economy would produce if all prices (including nominal wages) were fully flexible

YP in graph

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14
Q
  1. negative demand shock
  2. positive demand show
  3. negative supply shock
  4. positive supply show
A
  1. total spending falls (AD shifts to left)
  2. total spending rises (AD shifts to right)
  3. total production decreases (AS shifts to left)
  4. total production increases (AS shifts to right)
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15
Q

Supply-side aggregate supply

A
  • if real GDP exceeds potential output only temporary
  • eventually low unemployment will cause nominal wages to rise and SRAS shifts left
  • if potential output exceeds real GDP only temporary
  • eventually high unemployment will cause nominal wages to fall and SRAS shifts right
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16
Q

inflationary and deflationary gap

A
  • graph shows deflationary gap (inflationary is on other side)
  • ‘close’ inflationary gaps
  • ‘fill’ deflationary gaps
  • inflationary gap: amount by which SRAS exceeds LRAS
  • deflationary gap: amount by which LRAS exceeds SRAS
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17
Q

examples of negative demand shock:

A
  • unexpected tax increase
  • unexpected cut to benefits
  • financial crisis leading to fall in investment
  • unexpected rise in unemploymentd
18
Q

output gap equation

A
19
Q

long run self-adjustment to postive demand shock shock

A
  • Postive demand shock leads to inflationary gap
  • Short run: increase in APL and output, decrease in unemployment
  • Long run: nominal wages increase causing SRAS to decrease, moving economy back to potential output
20
Q

stabilization policy

A

use of government policy to reduce severity of recession and reign in excessibly strong expansion

21
Q

why do negative supply shocks pose a policy dilemma?

A
  • stabilising output requires an increase in AD which leads to inflation
  • stabilising APL requires a decrease in AD which deepens output slump

Macroeconomics (11 decks)

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