All Flashcards
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.
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).
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%).