Week ten learning Flashcards
How do economic fluctuations manifest in terms of production and employment?
Economic activity fluctuates yearly with production typically rising, but recessions (declining real incomes and rising unemployment) and depressions (severe recessions) can occur.
What are key indicators of economic fluctuations?
Key indicators include Real GDP, investment, and unemployment rates. Recessions are defined by two consecutive quarters of GDP decline.
How does the AD-AS model describe the short-run economic fluctuations?
In the short run, economic fluctuations are unpredictable, and most macroeconomic quantities fluctuate together. As output falls, unemployment rises.
What does the long-run aggregate supply (AS) curve represent?
In the long run, the AS curve is vertical, reflecting that output depends on factors like labor, capital, natural resources, and technology, not the inflation rate.
What is the AD curve and why is it downward-sloping?
The AD curve shows the total quantity of goods and services demanded at each inflation rate. It is downward-sloping due to the wealth effect, interest-rate effect, and exchange-rate effect.
What are the key theories explaining the short-run upward-sloping AS curve?
Misperceptions Theory: Suppliers may misinterpret price changes.
Sticky-Wage Theory: Nominal wages adjust slowly due to contracts and norms.
Sticky-Price Theory: Some prices adjust slowly due to menu costs.
What factors can shift the AD curve?
Changes in consumption, investment, government spending, and net exports can shift the AD curve.
What factors can shift the AS curve?
Changes in labor, capital, natural resources, technology, and expected inflation affect the AS curve.
What are the effects of shifts in AD and AS on the economy?
Shifts in AD can have short-run effects on output and long-run effects on inflation. Adverse shifts in AS can reduce output and raise unemployment.
What are common policy responses to a recession?
Monetary and fiscal policies can be used to stimulate AD or mitigate adverse AS shifts. Alternatively, doing nothing allows the economy to adjust naturally as expected inflation changes.
How are short-run and long-run fluctuations analyzed using the AD-AS model?
Short-run fluctuations are analyzed using the AD-AS model where the AD curve slopes downward due to wealth, interest-rate, and exchange-rate effects. In the long run, the AS curve is vertical, unaffected by inflation, while the short-run AS curve is upward-sloping due to misperceptions, sticky wages, and sticky prices.
