Business Cycles: Theory Flashcards
law of demand
holding all other prices fixed the demand for good, i is (typically presumed to be) decreasing in its own price
what causes law of demand
-substitution effect
-income effect
substitution effect
substitute towards cheaper goods
income effect
price increase effectively compress a persons budget
who is responsive to business cycle
house holds and firms
aggregate demand: conical effect for additional (wealth effect)
holding the money supply fixed, an increase in the current price level P led to a decrease in the purchasing power. in effect, households feel less wealthy (because income and accumulated savings don’t go as far) and so they can cut their consuming spending
-inflation is high so wealth is compressed, o we consume less (downward sloping demand)
law of supply
holding all other prices fixed, the supply of good i us increasing in its own price, namely because it renders production more profitable
do tech and capital drive business cucle
no because they are more long run phenomenon
aggregate supply long run
while nominal factors osts may be fixed in the short run, they almost surely adjust in the long un
aggregate supply long run implication
as factor costs adjust the profit motive vanishes such that aggregate supply is effectively independent of the price level
aggregate supply intuition
in the long run, AS mainly depends on the prevailing prod. possibilities but not on the price level
what does demand shock do to output and price
decreases both
example of demand chock (negative)
-stock market turbulence
-increased economy uncertainty
-increased taxation
demand shock short tun (negtaive)
wages and inputs are rigid the decreased price level causes a recession
demand shock transition (LR) (negative)
temporary: as demand recovers both output and the price level return to their original level
Permanent: factor prices adjust to the newly prevailing price level, which shifts Y to the right
