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Economics > Business cycles & Aggregate Demand/Supply > Flashcards

Business cycles & Aggregate Demand/Supply Flashcards

1
Q

what does full employment level mean

A

everyone who wants a job can get one

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2
Q

what is the natural level of Gdp

A

full employment
GDP as high as it can be (all resources used)
There is competition for resources which is causing inflation

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3
Q

what does ceteris paribus mean

A

assumption that everything but supply and demand are held constant

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4
Q

what is monetary neutrality

A

changes in money supply are assumed to have no effect in the longrun but in the short run do have an effect

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5
Q

3 reasons why the AD curve is downward sloping

A

the wealth effect
the interest rate effect
the exchange rate effect

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6
Q

what does the wealth effect cause an increase in

A

consumption

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7
Q

what is the wealth effect

A

when prices go down, but your income doesnt and you feel more wealthy encouraging you to spend more

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8
Q

what does the interest rate effect cause an increase in

A

investment

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9
Q

what is the interest rate effect

A

prices fall and so househoods try to reduce their holding of money by lending it out, boosting savings and investment

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10
Q

what does exchange rate effect cause an increasein

A

net exports

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11
Q

what is the exchange rate effect

A

as the value of your currency falls, other countries want to switch to using your products as theyre relatively cheaper. The exports in your country increase and inports decrease

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12
Q

3 reasonswhy the AS curve upward sloping in the short run

A
  1. sticky wage theory
  2. sticky price theory
  3. misperceptions theory
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13
Q

what is the stiicky wage theory

A

wages are fixed by contracts, increase in prices reduces the real wage paid by the firm
wages change slowly

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14
Q

what is the sticky price theory

A

firms don’t just adjust prices immediately in repsonse rto any change in the eonomy,
Stable prices keep regular customers
Menu costs, hard to change

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15
Q

what are menu costs

A

prices that are associated with printed catelogues and menus, changing these would be expensive and can’t be dont every time there is a change in the economy

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16
Q

what is the misperceptions theory

A

changes in the overall price level can mislead suppliers in the individual markets they operate in

ie. is this a change in my individual market or inflation/deflation in the economy as a whole

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17
Q

example of misperceptions theory

A

firm may give a raise to its employees because of inflation, their nominal wage has increase butnot their real wage
However, the employees respond as if they are making more money

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18
Q

why is the AS curve vertical in the longrun

A

In the longrun, the production of goods and services only depends on the factors of production, price level wont change long run output

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19
Q

where is the long run AS placed

A

natural/potential level of output

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20
Q

what are the factors of production that can change long run supply

A

labour
capital
natural resources
technology

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21
Q

what causes shifts in the AD curve1

A

components of GDP
eg change in government spending, changes in investment, consumption or net exports
changes in supply of money

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22
Q

when supply of money is increased, does AD shift right or left

A

right

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23
Q

what causes a shift in the long run AS curve

A

anything that changes potential output (factors of production)

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24
Q

what causes shifts in the AS short run curve

A

factors of production eg shifts in labour due to immigration/emigration, change in technological knowledge, natural resources or capital
expected price level

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25
Q

what is the long run equilibrium

A

when the SRAS, AD equilibrium also hits the LRAS

26
Q

inflation causes the AD curve to shift in what direction

A

right

27
Q

deflation causes the AD curve to shift in what direction

A

left

28
Q

over time the LRAS curve should shift more to what direction, why

A

left, better production factors eg improved tech

29
Q

highest point in a business cycle is called

A

peak

30
Q

lowest point in a business cycle is called

A

trough

31
Q

difference between peak and trough is called

A

amplitude

32
Q

whta is aggregate demand

A

quantity of all goods and services demanded in an economy at any given price level

33
Q

what is aggregate supply

A

total quantity of all goods and services that firms sell at any given price

34
Q

in an expansionary period is GDP growing or contracting

A

growinf

35
Q

in a recession or a depression is GDP growing or contracting

A

CONTRACTING

36
Q

in the longrun, GDP grows but in the short run it….

A

fluctutes

37
Q

is recovery considered growth

A

no

38
Q

what is recovery

A

GDP expands after a recession or depression. Recovery lasts until long term potential level is reached again

39
Q

what are output gaps

A

difference between actual and potential outputs

40
Q

if something makes production more expensive, will thi shift SRAS to the right or left

A

left

41
Q

if something makes prodution cheaper, will this shift SRAS to the left or right

A

right

42
Q

if the LRAS is above the equilibrium, what period is the economy in

A

recession

43
Q

if the LRAS is below the equilibrium, what period is the economy in

A

boom/expansion

44
Q

if the LRAS is equal to the equilibrium, what period is the economy in

A

Long run equilibrium

45
Q

what was the name for the high risk mortgages given out prior to the 2008 financial crisi

A

sub prime

46
Q

examples of countries who requested bailouts in 2010 + after recession

A

portugal
greece
ireland

47
Q

what is the political business cycle

A

that governments persue expansionary periods ahead of elections to increase chance of reelection

(whats good for politicians in the short run rather than fixing the root of issues)

its hard to win elections saying you’ll save money for future problems when opponents are solving current problems

48
Q

why was there pressure to give sub prime mortgages in years leading to 2008

A

seen as positive that everyone could afford housing

political pressure

49
Q

how did covid change demand

A

some goods/services no longer available because of lockdown eg hospitality

some goods/services increase in demand eg dumbells

50
Q

how did covid cause a supply shock

A

movement of goods and services slowed

some businesses shut down

51
Q

what is used in forecasting growth

A

consumer confidence
firm invetsments
interest rates
trends in income, employment and gdp

52
Q

what is contraction

A

when the output is lower than the previous period

53
Q

what is a tredn

A

a long term movement

54
Q

causes of changes in the business cycle

A

household spending changes eg how much labour they decide to supply
firms decision making eh how much to invest and produce
external forces eg war
government policy eg about taxes, infrastructure, investment
confidence and expectations eg security of jobs influences decisions

55
Q

what are external forces

A

events abroad

unexpected events eg tsunmai

56
Q

what is an economic bubble

A

prices of assets and securities are way above their fundamental value

57
Q

what are procyclical variables to GDP

give example

A

variables that move together with gdp

eg employment, investment, consumption, productivity

58
Q

what are countercyclical variables to gdp

give examples

A

move in opposite directions to gdp

eg government spending increases during crisis
unemployment
real wages

59
Q

why does government spending increase during a crisis

A

maintains a steady GDP,

stimulates consumption(compensating for a shock in demand)
protects peoples saving
save existing jobs

60
Q

what would ahppen to the AD if governments were to decrease spending during a recession

A

AD shifts down even more

LRAS could eventually shift, lowering production levels eg Greece has still not returned to pre 2008 levels

Economics (25 decks)

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