All Flashcards
Compare and contrast recessionary and inflationary gaps.
Recessionary gaps have output below potential and high unemployment; inflationary gaps have output above potential and low unemployment.
What are the differences between SRAS and LRAS?
SRAS is upward sloping and reflects short-run production costs; LRAS is vertical and represents potential output at full employment.
Compare the short-run and long-run effects of an AD increase.
In the short run, output and price level increase; in the long run, only the price level increases as the economy returns to full employment.
Differentiate between fiscal and monetary policy.
Fiscal policy involves government spending and taxation; monetary policy involves controlling the money supply and interest rates.
Compare the effects of a supply shock vs. a demand shock.
Supply shocks directly affect SRAS/LRAS, impacting output and price level; demand shocks directly affect AD, also impacting output and price level.
Compare the self-correction mechanism in a recessionary vs. an inflationary gap.
In a recessionary gap, wages fall, shifting SRAS right. In an inflationary gap, wages rise, shifting SRAS left.
What is the difference between a temporary and a permanent supply shock?
A temporary supply shock only affects SRAS, while a permanent supply shock affects both SRAS and LRAS.
Compare the impacts of expansionary fiscal policy and expansionary monetary policy.
Both aim to increase aggregate demand, but fiscal policy does so through government spending or tax cuts, while monetary policy does so through lower interest rates and increased money supply.
Compare the effects of an increase in government spending versus an increase in consumer confidence.
Both shift the AD curve to the right, but government spending is a direct injection into the economy, while consumer confidence affects consumer spending decisions.
Compare the effects of a change in SRAS versus a change in LRAS.
A change in SRAS affects the economy in the short run, while a change in LRAS affects the economy's potential output in the long run.
Define long-run equilibrium.
The point where LRAS, SRAS, and AD intersect, representing full employment output.
What is a recessionary gap?
When equilibrium output is less than full-employment output.
Define inflationary gap.
When equilibrium output is greater than full-employment output.
What is LRAS?
Long-Run Aggregate Supply; represents potential output at full employment.
Define SRAS.
Short-Run Aggregate Supply; shows the relationship between price level and quantity of output supplied in the short run.
What is Aggregate Demand (AD)?
The total demand for goods and services in an economy at a given price level.
Define full employment level of output.
The level of output an economy can produce when it is using all its resources efficiently.
What are economic shocks?
Unexpected events that shift the AD or AS curves.
Define self-correction mechanism.
The economy's natural tendency to return to long-run equilibrium through price and wage adjustments.
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is producing at its potential output.
How does a decrease in consumer confidence affect AD?
It shifts the AD curve to the left, decreasing output and price level in the short run.
How do lower wages affect SRAS?
Lower wages reduce production costs, causing SRAS to shift to the right.
How does increased productivity affect LRAS?
Increased productivity shifts the LRAS curve to the right, increasing potential output.
Explain the impact of a permanent negative supply shock on LRAS.
It shifts the LRAS curve to the left, leading to lower output and higher prices.
How does high unemployment affect wages?
High unemployment puts downward pressure on wages.
How does low unemployment affect wages?
Low unemployment puts upward pressure on wages.
Apply the concept of self-correction to a recessionary gap.
High unemployment leads to lower wages, shifting SRAS rightward until full employment is restored.
Apply the concept of self-correction to an inflationary gap.
Low unemployment leads to higher wages, shifting SRAS leftward until full employment is restored.
How does an increase in the capital stock affect the LRAS?
It shifts the LRAS curve to the right, indicating an increase in the economy's potential output.
How does a decrease in the money supply affect aggregate demand?
It shifts the AD curve to the left, decreasing overall demand in the economy.