All Flashcards
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).
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.