AD/AS Model Flashcards
(25 cards)
What is the purpose of the AD/AS model?
To explain changes in output (Y) and price level (P) through the interaction of Aggregate Demand (AD) and Aggregate Supply (AS).
What is Aggregate Demand (AD)?
Total output demanded at each price level, holding all else constant.
Why is the AD curve downward sloping?
Due to the Wealth Effect, Interest Rate Effect, and International Trade Effect.
What shifts the AD curve to the right?
Increases in C, I, G, X or decreases in M, lower interest rates, increased money supply, decreased taxes, or decreased exchange rate.
What shifts the AD curve to the left?
Decreases in C, I, G, X or increases in M, higher interest rates, decreased money supply, increased taxes, or increased exchange rate.
What is Aggregate Supply (AS)?
Total quantity of national output supplied at each price level.
What is the shape of the Short-run AS (SRAS) curve?
Upward sloping.
What is the shape of the Long-run AS (LRAS) curve?
Vertical at full-employment output (Y*).
What can cause a rightward shift in AS?
Improved productivity, technology, increased labour/capital supply, or lower production costs.
What can cause a leftward shift in AS?
Supply shocks or higher wages/input costs.
What is equilibrium in the AD/AS model?
Occurs where AD = AS at price (P₀) and output level (Y₀).
What happens if prices are above P₀?
AS > AD leads to unsold goods and falling prices.
What happens if prices are below P₀?
AD > AS leads to shortages and rising prices.
What is a recessionary gap?
When actual output (Y) is less than potential output (Y), resulting in high unemployment.
What is an inflationary gap?
When actual output (Y) is greater than potential output (Y), leading to an overheating economy and inflation pressure.
What are demand-side policies?
Policies that manage short-run output and prices, shifting the AD curve.
What are supply-side policies?
Policies that boost potential output (Y*), shifting the AS curve.
What tools are used in demand-side policies?
Fiscal policy (G↑ or T↓) and monetary policy (i↓ or money supply ↑).
What tools are used in supply-side policies?
Tax cuts, deregulation, labour market reform, privatisation, and improvements in technology and infrastructure.
What are the key differences between Keynesian and Classical views?
Keynesians advocate for intervention; Classical economists believe in self-adjusting markets.
What is stagflation?
A situation where AS shifts left, causing rising prices and stagnant output.
What is the goal of fiscal stabilisation policy?
To keep actual output (Y) close to potential output (Y*) and avoid large booms and busts.
What are the tools of fiscal stabilisation policy?
Discretionary fiscal policy and automatic stabilisers.
What is a key summary point about the AD/AS model?
The AD curve is downward sloping; the AS curve shape depends on the time frame.
