All Flashcards
In a recessionary gap graph, where is the equilibrium relative to LRAS?
The equilibrium is to the left of the LRAS curve.
In an inflationary gap graph, where is the equilibrium relative to LRAS?
The equilibrium is to the right of the LRAS curve.
What does a rightward shift of the SRAS curve indicate?
An increase in aggregate supply, possibly due to lower production costs.
What does a leftward shift of the SRAS curve indicate?
A decrease in aggregate supply, possibly due to higher production costs.
What does the intersection of SRAS, LRAS, and AD represent?
Long-run equilibrium at full employment.
How does an increase in consumer confidence show on an AD/AS graph?
It is represented by a rightward shift of the AD curve.
How is long-run adjustment shown on an AD/AS graph after a demand shock?
A shift in the SRAS curve to restore equilibrium at the LRAS curve.
What happens to the price level and output when SRAS shifts left?
Price level increases, and output decreases.
What happens to the price level and output when SRAS shifts right?
Price level decreases, and output increases.
What is the shape of the LRAS curve and what does it represent?
It is vertical, representing the economy's potential output at full employment, independent of the price level.
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.
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.