All Flashcards
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.
Define Aggregate Demand (AD).
The total demand for goods and services in an economy at a given price level.
Define Short-Run Aggregate Supply (SRAS).
The total quantity of goods and services that firms are willing and able to supply at different price levels in the short run.
Define Long-Run Aggregate Supply (LRAS).
The level of output an economy can produce when using all its resources efficiently; it's vertical at the potential output level.
What is short-run aggregate equilibrium?
The point where the quantity of aggregate demand equals the quantity of aggregate supply (AD = SRAS).
What is long-run aggregate equilibrium?
The point where AD, SRAS, and LRAS all intersect, representing full employment and potential output.
Define recessionary gap.
A situation where the short-run equilibrium output is below the full-employment level.
Define inflationary gap.
A situation where the short-run equilibrium output is above the full-employment level.
What is potential output?
The level of output an economy can achieve when all resources are fully employed.
Define full employment.
The level of employment when the economy is producing at its potential output.
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is at full employment (typically 4-6%).
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).