All Flashcards
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%).
How does increased government spending affect a recessionary gap?
It can help close the gap by increasing aggregate demand and stimulating economic activity.
How do tax cuts affect an inflationary gap?
Tax cuts can worsen an inflationary gap by further increasing aggregate demand.
What is the effect of contractionary fiscal policy on AD?
Contractionary fiscal policy (e.g., reduced government spending or increased taxes) decreases AD.
What is the effect of expansionary fiscal policy on AD?
Expansionary fiscal policy (e.g., increased government spending or reduced taxes) increases AD.
What are the potential drawbacks of using fiscal policy to close a gap?
Potential drawbacks include time lags, crowding out, and the risk of increasing the national debt.
How does monetary policy affect AD?
Monetary policy, such as changing interest rates, influences borrowing costs and investment, thereby affecting AD.
What is the effect of lower interest rates on AD?
Lower interest rates encourage borrowing and investment, shifting the AD curve to the right.
How might the government intervene to correct an inflationary gap?
The government could decrease government spending or increase taxes.
What is the impact of increased regulations on SRAS?
Increased regulations can increase production costs, shifting the SRAS curve to the left.
How does self-correction address a recessionary gap?
Self-correction relies on wages and prices adjusting downwards, shifting SRAS to the right and restoring equilibrium at full employment.
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.