Flashcards
L7 AD/AS model
Cards in this deck (17)
- 1simple version of business cycleA typical 7-11 year Juglar business cycle usually has two phases:
Juglar was a French doctor and statistician
A contraction
An expansion
and two turning points:
A peak
A trough - 2is The unemployment rate is a counter-cyclical variable ?yes
‘Counter’ means it goes against the business cycle
–> recessions cause the unemployment rate to increase. - 3is Inflation is a pro-cyclical variable?yes
‘Pro’ means it follows the business cycle;
-> during economic expansions the inflation rate usually increases while during recessions the inflation rate usually decreases (unless recession is caused by a “supply shock”). - 4what is the ad/as model?Aggregate demand (AD) and aggregate supply (AS) model is a model that explains “short-run” fluctuations in real GDP and the price level.
- 5what is the ad curve?A curve showing the relationship between the price level and the quantity of real GDP demanded by households, firms and the government.
AD curve shows the equilibrium level of real GDP, where total spending = total output, for each price level. - 6what is the as curve?A curve showing the relationship in the short-run between the price level and the quantity of real GDP supplied by firms.
- 7three reasons why the ad curve slopes downwardswealth effect
interest rate effect
international trade effect - 8what is wealth effect?An increase in the price level will decrease the real value of household wealth & reduce the amount of consumption.
If the price level is rising, then real GDP is dropping
People holding money will experience falling wealth - 9what is interest rate effect?An increase in the price level raises interest rates (increases D for money) which decreases investment (& C).
- 10what is international trade effectAn increase in the domestic price level causes imports to become relatively cheaper
Thus, residents want to buy more imports (M)
An increase in the domestic price level causes exports to be more expensive for overseas
Thus, foreigners buy less exports (X)
Since net exports = X – M, then net exports fall - 11AD will increase if: (shift right)C, I, G or net Xs increase
Gov. decreases T
The central bank lowers the interest rate
Businesses invest more because it is cheaper to borrow
$A depreciates
Exports (X) rise
Imports (M) fall
X-M rises and net Xs rises - 12what is sras?Short Run Aggregate Supply (SRAS) curve shows the effect of changes in total output or real GDP on the price level (via changes in costs)
AS curve represents a country’s production. As total output increases
greater amounts of inputs may be needed to produce a unit of output
price of inputs will rise and thus overall prices will rise - 13sras will increase when: (shift right)Labour or capital increases
Adopt new technologies
Productivity increases
Price for a key natural resources (e.g. petroleum) fall
Price (wage) expectations fall - 14when does the lras shift?An increase in resource inputs such as the labour and capital
Adopt new technologies. - 15quick overviewOver time the economy grows as the population, labour force and capital stock increase and as technology develops.
This means that both the long run and short run AS curves shift to the right – economic growth is occurring increasing potential real GDP.
Over time, the AD curve will also shift to the right as consumption, investment & government spending all tend to increase. - 16If the AD curve shifts further to the right than AS, then the economy will experience:an increase in inflation
- 17If AD curve increases less than AS, then the economy will experience:an increase in unemployment
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- ? economics Flashcards on L7 AD/AS model, created by bonnie--95 on 14/06/2016.
- Created by
- bonnie--95 · Jun 2016
- Updated
- Jun 16, 2016
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