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Econ HL > Macro - 9 > Flashcards

Macro - 9 Flashcards

1
Q

(9.2) What is the macroeconomics short-run?

A

-Is when the price of resources is flexible, but the average price level can change
-The wages tend to change once per year due to contracts and rarely fall, while food prices change daily

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2
Q

(9.2) What is macroeconomics long-run?

A

When the price of all resources can change along with the general price level in the economy

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3
Q

(9.2) What is aggregate supply?

A

-It is the total amount of goods and services provided in the economy at any given price level

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4
Q

(9.2) What information does aggregate supply give?

A

Shows us the level of productive capacity in a country
- There can be two supply curves

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5
Q

(9.2) What is Short-run aggregate supply (SRAS)

A

-Positive relation between price and output
-The period of time where the prices of the factors of production are fixed (especially wages are fixed)

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6
Q

(9.2) Why do SRAS shift?

A

Because there is a change in the factors of production

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7
Q

(9.2) What are possible changes in factors of production?

A
  1. A change in wage rates
  2. Supply shocks
  3. Change in government indirect taxes or subsidies
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8
Q

(9.2) What happens when there is a change in wage rates?

A

As a wage increases, so will the cost of production, leading to a reduction in SRAS

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9
Q

(9.2) What happens when there are supply shocks

A

a positive supply shock increases SRAS, but a negative supply shock decreases SRAS. the combination of a stagnating (falling) aggregate output and a higher price level (inflation); stagflation occurs when SRAS decreases.

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10
Q

(9.2) What happens when there is a change in government indirect taxes or subsidies

A

-Indirect taxes increase the cost of production
-Subsidies lower cost of production

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11
Q

(9.2) Where is the Short-run equilibrium in the AD-AS model?

A

It is where AD= SRAS (the average price level is determined along with Y)
(looks very much like the micro equilibrium)

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12
Q

(9.4) What does it mean when the SRAS equilibrium shifts left? (Keynesian model)

A

This suggests a recessionary gap, the economy is operating below potential, unemployment and prices are under pressure

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13
Q

(9.4) What does it mean when SRAS equilibrium shifts right? (Keynesian model)

A

This suggests inflationary gap, a high demand for labor, and thus price pressure to rain resources and labor prices

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14
Q

(9.4) What does a recessionary gap represent?

A

Short-run equilibrium position where unemployment exceeds the natural rate due to a lack of AD

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15
Q

(9.4) Where is a inflationary gap found?

A

in a strong economy where there is a high demand for labour exceeding the natural rate

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16
Q

(9.4) What happens if prices cannot fall during a recession?

A

Then the economy will be stuck in the short-run

17
Q

(9.4) What does the Keynesians believe about the long-run equilibrium?

A

They believe that the long-run equilibrium level of output can be below full employment

18
Q

(9.4) What happens if the AD increases further in LRAS equilibrium

A

-This will create inflationary pressures as the factors of production become scarce
-At full employment, any increase in AD is purely am inlfation effect

19
Q

(9.4) In Keynesian view, for what are Contractionary policies used?

A

Will be used to reduce AD and inflationary pressures

20
Q

(9.6) In what is Keynesian view right?

A

price movement is asymmetric, and demand in an excess capacity economy does not increase the price

21
Q

(9.6) For Keynesians, where is the focus?

A

on the short-term as they feel prices are not self-righting

22
Q

(9.6) What is the role of the government for the monetarist view?

A

The role of the government is to stay out and let markets work as dictated by price action

23
Q

(9.1) What is aggregate demand?

A

Aggregate demand is the total output of an economy during a period of time at a given price level

24
Q

(9.1) How are price and quantity presented in Aggregate demand?

A

Price = Average price level
Quantity = National real output or income

25
Q

(9.1) What is aggregate demand made out of?

A
  • Consumptions (C): Spending by consumers on durable goods (a couch) and non-durable goods (ice cream)
  • Investment (I): The addition of capital stock (machines, building) to the economy made by firms. Replacement investment, induced investment (new purchases of machines)
  • Government (G): All levels of government spending on military, roads, education, etc
  • Net Exports (X - M): Measure exports bought by foreigners, and imports bought by Peruvians. If negative, Peruvians buy more from the world than it sells to the world
26
Q

(9.1) How does a change in price levels affect the aggregate demand curve?

A

lt leads to movements along the AD

27
Q

(9.1) How does a change in one of the components of the AD curve affect it?

A

It leads to a shift in the AD curve

28
Q

(9.1) What different factors affect consumption? And therefore affect the AD curve.

A
  • Changes in income taxes
  • Changes in interest rates
  • Change in wealth
  • Changes in expectations / consumer confidence
  • Household indebtedness
  • Expectations of future prices levels
29
Q

(9.1) What different factors affect investment? And therefore affect the AD curve.

A
  • Changes in interest rate
  • Changes in taxes
  • Changes in technology
  • Changes in expectation/business confidence
  • Level of corporate indebtedness
  • Legal/institutional changes
30
Q

(9.1) What different factors affects Government spending?

A
  • Changes in political priorities
  • Changes in economic priorities with the desire to influence AD
31
Q

(9.1) What different factors affect the Net Exports (X - M)?

A

Exports (X)
- If foreign demand for goods increases, then exports increase
- A change in the value of the currency relative to the country importing
- Change in countries’ trade policies (US tariffs)
- The difference in inflation rates (buy in lower rate country)

Imports (M)
- As our income rises, we spend - some on imported goods (elasticity of demand to import)
- As corporate income increases, they invest, at times acquiring foreign goods.
- Foreign exchange can affect imports
- Trade policies and inflation rates

32
Q

(9.3) Explain the Long run equilibrium in the neoclassical model

A

The economy will always move towards its long-run equilibrium at the point of full employment. In the monetarist new classical, all factors of production and prices can change in the long run, thus bringing the economy to its potential GDP

33
Q

(9.3) What is the long run equilibrium?

A

The long run equilibrium is when AD = SRAS = LRAS

34
Q

(9.3) How the new classical model works with SRAS?

A

Assume that the economy is perfectly balanced
Then for that, for whatever reason, AD increases

35
Q

(9.3) SRAS (new classical) reluts in …?

A

Increase in output

36
Q

(9.3)What does the increas in average price level in the keynsian SRAS suggest?

A

It suggests that all factors of production are now becoming more expensive

37
Q

(9.3)What will an increase in the cost of the factors of production result in?

A

The increase in the cost of factors of production will lead to the SRAS curve shifting left
This shift will cause output to return to its long-run equilibrium resulting in no real GDP gain!

38
Q

(9.5) What are the factors that can change AS over the long term?

A
  • Increase in the quantities of the factors of production, including physical capital
  • Improvements in the quality of factors of production or resources such as human capital improvements, better worker health
  • Improvements in available and applied technology
  • Increases in efficiency by better use of resources
  • Institutional changes caused by changes in public/private corporations, amount of competition, govt. regulations
  • Reductions in the natural rate of unemployment. This fluctuates depending on economic conditions (currently, in the US during COVID, this increased) Why?
39
Q

(9.5) What is the relation between SRAS and LRAS?

A

As an economy experience long-run economic growth, LRAS shifts to the right (potential economy increases), and over time, SRAS will shift as well
However, the SRAS can shift without affecting LRAS (season fluctuations, changes in wages, oil prices)

Econ HL (6 decks)

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