All Flashcards
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.
How can fiscal policy address an inflationary gap?
Contractionary fiscal policy (e.g., increased taxes, decreased government spending) can reduce aggregate demand.
How can monetary policy address a recessionary gap?
Expansionary monetary policy (e.g., lower interest rates) can increase aggregate demand.
What is the impact of government spending on aggregate demand?
An increase in government spending shifts the AD curve to the right.
What is the impact of increasing taxes on aggregate demand?
An increase in taxes shifts the AD curve to the left.
How does expansionary monetary policy affect interest rates?
It lowers interest rates.
How does contractionary monetary policy affect interest rates?
It raises interest rates.
Evaluate the effectiveness of using fiscal policy to correct a recessionary gap.
Fiscal policy can increase AD, but it may have time lags and potential crowding-out effects.
Evaluate the effectiveness of using monetary policy to correct an inflationary gap.
Monetary policy can decrease AD, but its impact can be uncertain and depend on interest rate sensitivity.
What is the effect of increased government spending on the price level during full employment?
It can lead to inflation if the economy is already at full employment, as it increases aggregate demand without a corresponding increase in aggregate supply.
How does a decrease in the money supply affect investment?
It typically leads to higher interest rates, which can decrease investment spending.
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.