Ch. 12 Flashcards
(10 cards)
The different segments of the Business Cycle (recessions, expansions, peaks, and troughs) and
who determines these dates and periods in the United States
NBER- National Bureau of Economic Research
Recessions: 2 consecutive quarters (6 months) of negative real GDP growth
Expansions: the phase of the business cycle when the economy is growing and moving out of recession
Peaks: highest point of economic activity, marking the end of an expansion phase and the beginning of a contraction phase
Troughs: lowest point of economic activity, marking the end of a recession & beg. of a recovery phase where the economy starts to expand again
What is meant by potential output (GDP) and how it can be different from actual output (GDP)
Potential Output (GDP): the total amount of output a country could produce if all of its resources were fully engaged
It can be different from actual output (GDP) because actual output represents an economy’s current output
What the Aggregate Demand (AD) looks like and what relationship it is shows
Downward sloping line, showing a negative relationship between the price level of goods and services in an economy and the quantity of goods and services demanded at that price level
Price level increases, Real GDP bought decreases
Price level decreases, Real GDP bought increases
The overall spending in an economy is measured by AD and it consists of:
Consumption (C) + Government purchases (G) + Investment (I) + Net Exports (Nx)
The reasons for the AD curves shape:
- Real Wealth effect (higher inflation reduces the real value of assets such as stocks or
property reducing C). Note that inflation CAN reduce households real purchasing power
short-term if inflation changes faster than wages. - Foreign exchange effect (higher inflation increases the cost of US made goods and thereby
reduces Nx)
What relationship the Short-Run Aggregate Supply (SRAS) represents.
relationship between the overall price level in the economy and total production by firms in the short run
What shifts the AD (demand shocks) and the AS curve (supply shocks) left and right.
AD (demand shocks): changes in consumer spending, investment spending, government spending, and net exports,
Left: Decreased consumer confidence
Decreased government spending
Higher taxes
Decreased business investment
Lower expected future income
Decreased net exports
Right: increased consumer confidence
Increased government spending
Lower taxes
Increased business investment
Higher expected future income
Increased net exports
AS curve (supply shocks): changes in input costs like wages, raw materials, and technology, essentially reflecting changes in the cost of production for businesses
Left:
Higher input costs (wages, raw materials)
Natural disasters
Labor strikes
Government regulations increasing production costs
Supply chain disruptions
Right:
Lower input costs (wages, raw materials)
Technological advancements
Improved productivity
Favorable weather conditions (for agriculture)
How to use the ADAS model, including LRAS or potential output, to see if an economy is in
recession, expansion or at its potential and what this does for the price level. What are the
problems associated with each type of gap
Recession: If the equilibrium point on the ADAS graph falls to the left of the LRAS curve, the economy is considered to be in a recession, meaning the actual output is below potential output
Problem:
Expansion: If the equilibrium point is to the right of the LRAS curve, the economy is experiencing an expansion, producing output above its potential
Potential: When the equilibrium point aligns perfectly with the LRAS curve, the economy is considered to be at its potential output
How lower production or resource costs (creating a lower price level) will self-correct an
economy out of a recession – shift SRAS right – when many resources go idle or unused.
Similarly, how higher production or resource costs (which increases the price level) is a
result of excessive use of resources will shift SRAS left
That output gaps exists only in the short-term and will eventually close in the long-term
That output gaps exists only in the short-term and will eventually close in the long-term
