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econ 102 > AD-AS > Flashcards

AD-AS Flashcards

1
Q

what does AD stand for?

A

aggregate demand

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2
Q

what does AS stand for?

A

aggregate supply

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3
Q

what is the AD-AS model used to forecast?

A

output and the average price level

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4
Q

what does AD-AS describe?

A

the forces that determine aggregate outcomes such as total output and avg. prices across the economy as a whole

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5
Q

what does the aggregate demand curve show?

A

the relationship between the price level and the total quantity of output that buyers collectively plan to purchase

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6
Q

what was does the AD curve slope?

A

downwards sloping

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7
Q

what does the aggregate supply curve show?

A

the relationship between the price level and the total quantity of output that suppliers collectively produce

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8
Q

what way does the AS curve slope?

A

upwards sloping

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9
Q

what is macroeconomic equilibrium?

A

occurs when the quantity of output that buyers collectively want to purchase is equal to the quantity that suppliers collectively want to produce

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10
Q

what does macroeconomic eqm determine?

A

the level of equilibrium GDP

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11
Q

how are the AD-AS framework different from the microeconomic supply and demand framework?

A

they focus on a different set of trade offs and macroeconomic forces

in macro, the key trade offs are across time

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12
Q

what is aggregate expenditure?

A

the total amount of goods and services that people want to buy across the country

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13
Q

what is the formula for AE?

A

AE = C + I + G + NX

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14
Q

why is the AD curve downwards sloping?

A

as price level increases, inflation increases, and the real interest rate increases, therefore AD decreases because the opp cost of spending increased

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15
Q

what are the other economic forces that lead AD to be downwards sloping?

A
  • international trade effect (relatively small) -> increase in price = decrease in NX = decrease in AE
  • wealth effect -> increase in price = decrease in real wealth = increase in consumption = decrease in AE
  • debt effect -> increase in price = decrease in real value of nominal debt = consumption increases
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16
Q

how does a change in price affect the AD curve?

A

movement along the AD curve

higher price = move up

lower price = move down

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17
Q

how does changes in spending affect the AD curve?

A

shift the AD curve

increase in AE = shift right

decrease in AE = shift left

18
Q

what are the AD shifters?

A
  1. consumption
  2. investment
  3. gov. expenditures
  4. net exports
19
Q

why is the AS curve upward sloping?

A

a higher average price level results in a greater quantity of output supplied

20
Q

how does price affect the AS curve?

A

movement along the curve

price increase = move up

price decrease = move down

21
Q

how does change in production cost shift the AS curve?

A

shift the curve

increase in AE = shift right

decrease in AE = shift left

22
Q

what are the 3 AS shifters? how do they shift / move the AS curve?

A
  1. input prices - increase p = left; decrease p = right
  2. productivity - decrease productivity = left; increase productivity = right
  3. exchange rate - depreciate = left; appreciate = right
23
Q

what is monetary policy?

A

the process of setting interest rates in an effort to influence economic conditions

24
Q

what are the two types of monetary policies?

A

1) inflation-induced: when bank is worried that inflation is too low, it responds by cutting real interest rate
2) output-induced: the bank cut real interest rate in an attempt to combat the decrease in GDP

25
Q

how does inflation-induced response affect the AD curve?

A

an inflation-induced change in interest rates does not shift the AD curve

26
Q

how does output-induced response affect the AD curve?

A
  • an output induced change in interest rates changes the real interest rate at the prevailing price level
  • shift the AD curve
27
Q

what is classified as expansionary?

A

decrease in real interest rate

28
Q

how does the AD respond with an expansionary policy?

A

the AD curve shifts right

29
Q

what is a fiscal policy?

A

the government’s use of spending and tax policies to influence economic conditions

30
Q

what is the multiplier?

A

the multiplier is a measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending

31
Q

how do you forecast macroeconomic outcomes?

A
  1. determine if there is a shift in AD or AS
  2. determine if the shift is an increase or a decrease
  3. determine the change in price level and output in the new equilibrium
32
Q

what change does a change in the avg. real price level have in the long run?

A

in the long run, a change in the avg. price level has no effect on real variables

33
Q

what does the long-run AS curve look like?

A

vertical

34
Q

how does AD affect long-run output?

A

AD is irrelevant to long-run output

35
Q

what is the very-short run AS curve?

A

the AS curve that applies to the very short run, in which no prices have changed

36
Q

how does the very-short run AS curve look?

A

looks horizontal because prices are effectively fixed

37
Q

what is a sticky price?

A

prices that adjust sporadically and sluggishly to changes in market conditions

they explain why the short-run is upward slopping

38
Q

what is a short-run AS curve?

A

the AS curve that applies over a period when prices are neither fully fixed nor fully flexible

upwards sloping

39
Q

what is the medium-run AS curve?

A

a period in which firms have time to adjust to an output gap

40
Q

what is the difference between medium-run AS curve and short-run AS curve?

A

the medium-run curve is steeper than the short-run AS curve

econ 102 (10 decks)

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