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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.
How does increased consumer confidence affect the AD curve?
Increased consumer confidence leads to higher spending, shifting the AD curve to the right.
How does a decrease in input costs affect the SRAS curve?
A decrease in input costs increases profitability for firms, shifting the SRAS curve to the right.
What is the effect of technological advancements on the LRAS curve?
Technological advancements increase potential output, shifting the LRAS curve to the right.
How does high unemployment relate to a recessionary gap?
High unemployment is a key characteristic of a recessionary gap, indicating that the economy is producing below its potential.
How does rapid inflation relate to an inflationary gap?
Rapid inflation is a potential consequence of an inflationary gap, as demand exceeds the economy's capacity to produce.
What happens to the price level during a recessionary gap?
The price level tends to decrease or remain stable during a recessionary gap due to weak demand.
What happens to real GDP during an inflationary gap?
Real GDP is above potential output during an inflationary gap.
How does government spending affect AD?
Increased government spending directly increases aggregate demand, shifting the AD curve to the right.
How do taxes affect AD?
Decreased taxes increase disposable income, leading to increased consumer spending and a rightward shift in the AD curve.
How does an economy self-correct from a recessionary gap?
Wages and prices eventually fall, shifting the SRAS curve to the right until full employment is restored.
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%).