Classical Aggregate Supply, Aggregate Demand (AS/AD) Model- SR and LR Flashcards
(10 cards)
What is the shape of the Short-Run Aggregate Supply (SRAS) curve and why?
SRAS is upward-sloping because, in the short run, wages and input costs are fixed, so firms respond to higher prices by increasing output.
What is the shape of the Long-Run Aggregate Supply (LRAS) curve in the classical model?
Vertical, because in the long run, the economy always returns to full employment output (Yfe) where all resources are fully employed.
What happens in the short run when Aggregate Demand (AD) falls?
Output decreases and the price level falls (P1 to P2), creating a recessionary gap with higher unemployment.
Why can’t firms immediately reduce wages in the short run?
Wages are “sticky” due to:
Minimum wage laws
High unemployment benefits
Strong trade unions
How does the economy self-correct in the long run after a recession in the classical model?
Unemployed workers lower their wage expectations, reducing costs → SRAS shifts right → Output returns to Yfe but at a lower price level (P3).
What is a recessionary (deflationary) gap?
The difference between actual output and potential output when the economy is below full employment.
What happens during an overheating/boom in the short run?
AD increases → Output rises above Yfe → Prices rise → Demand-pull inflation occurs (P1 to P2).
What causes SRAS to shift left in the long run after a boom?
Workers demand higher wages due to increased price levels → Increased costs → SRAS shifts left → Economy returns to Yfe at a higher price level (P3).
Why can the economy produce beyond Yfe in the short run?
Firms overwork existing resources, hire underemployed workers, and push beyond sustainable capacity—but only temporarily.
What are the inflation types associated with the AS/AD model?
Demand-pull inflation: Caused by rising AD.
Cost-push inflation: Caused by rising costs shifting SRAS left.
