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How does increased government spending affect a recessionary gap?
It can help close the gap by increasing aggregate demand and stimulating economic activity.
How do tax cuts affect an inflationary gap?
Tax cuts can worsen an inflationary gap by further increasing aggregate demand.
What is the effect of contractionary fiscal policy on AD?
Contractionary fiscal policy (e.g., reduced government spending or increased taxes) decreases AD.
What is the effect of expansionary fiscal policy on AD?
Expansionary fiscal policy (e.g., increased government spending or reduced taxes) increases AD.
What are the potential drawbacks of using fiscal policy to close a gap?
Potential drawbacks include time lags, crowding out, and the risk of increasing the national debt.
How does monetary policy affect AD?
Monetary policy, such as changing interest rates, influences borrowing costs and investment, thereby affecting AD.
What is the effect of lower interest rates on AD?
Lower interest rates encourage borrowing and investment, shifting the AD curve to the right.
How might the government intervene to correct an inflationary gap?
The government could decrease government spending or increase taxes.
What is the impact of increased regulations on SRAS?
Increased regulations can increase production costs, shifting the SRAS curve to the left.
How does self-correction address a recessionary gap?
Self-correction relies on wages and prices adjusting downwards, shifting SRAS to the right and restoring equilibrium at full employment.
What is the key difference between SRAS and LRAS?
SRAS is upward sloping and influenced by price level changes, while LRAS is vertical and determined by potential output.
Compare and contrast recessionary and inflationary gaps.
Recessionary gaps have output below potential and high unemployment, while inflationary gaps have output above potential and low unemployment.
What is the difference between fiscal and monetary policy?
Fiscal policy involves government spending and taxation, while monetary policy involves managing interest rates and the money supply.
Differentiate between a shortage and a surplus in the context of GDP.
A shortage occurs when aggregate demand exceeds aggregate supply, while a surplus occurs when aggregate supply exceeds aggregate demand.
Compare the short-run and long-run effects of an increase in AD.
In the short run, it increases both price level and output. In the long run, it mainly increases the price level, with output returning to potential.
Compare self-correction and government intervention.
Self-correction relies on market forces to restore equilibrium, while government intervention uses fiscal or monetary policies to actively manage the economy.
What are the differences between demand-pull and cost-push inflation?
Demand-pull inflation is caused by increases in aggregate demand, while cost-push inflation is caused by decreases in aggregate supply.
Differentiate between actual GDP and potential GDP.
Actual GDP is the current level of output, while potential GDP is the maximum sustainable level of output.
Compare the effects of a supply shock on SRAS and LRAS.
A supply shock directly affects SRAS, causing it to shift. LRAS is generally unaffected unless the shock permanently alters potential output.
Compare the effects of increased government spending vs. tax cuts.
Increased government spending directly increases AD. Tax cuts increase disposable income, indirectly increasing AD through consumer spending.
In the AD-AS model, what do the axes represent?
The vertical axis represents the Price Level, and the horizontal axis represents Real GDP.
What does the intersection of AD and SRAS represent?
It represents the short-run equilibrium, showing the equilibrium price level and real GDP.
What does the vertical LRAS curve signify?
It signifies that in the long run, output is determined by the economy's potential, not the price level.
How is a recessionary gap shown graphically?
The AD and SRAS intersection is to the left of the LRAS curve.
How is an inflationary gap shown graphically?
The AD and SRAS intersection is to the right of the LRAS curve.
What happens to the AD curve when government spending increases?
The AD curve shifts to the right.
What happens to the SRAS curve when input costs decrease?
The SRAS curve shifts to the right.
What happens to the LRAS curve with technological advancements?
The LRAS curve shifts to the right.
On an AD-AS graph, where is the full-employment level of output?
It is where the LRAS intersects the x-axis (Real GDP).
What does a rightward shift of the SRAS curve indicate?
It indicates an increase in aggregate supply, leading to lower prices and higher output (in the short run).