Macroeconomic Equilibrium shifts- AD, SRAS, LRAS Flashcards
(19 cards)
What happens when AD shifts to the right in the Classical model?
Output increases in the short run (SRAS intersects new AD).
Price level rises (demand-pull inflation).
If the economy was below Yfe, the gap closes.
In the long run, SRAS may shift left as resources tighten, returning output to Yfe at a higher price level.
What is demand-pull inflation?
Inflation caused by an increase in Aggregate Demand when the economy is near or at full capacity.
What is a negative output gap?
When actual output (Y1) is less than full employment output (Yfe), meaning resources are underused.
How does an increase in AD affect a negative output gap?
It moves the economy toward full employment (Yfe), increasing output and prices as spare capacity is used up.
What happens when AD shifts right in the Keynesian model (horizontal section)?
Output increases significantly.
Little or no increase in price level.
Spare capacity allows for growth without inflation.
What happens when AD shifts right in the Keynesian model (upward-sloping section)?
Output increases.
Price level also rises (demand-pull inflation begins).
Economy is moving closer to full employment.
What happens when AD shifts right in the Keynesian model (vertical section)?
Output cannot increase.
All increases in AD cause inflation only.
What causes a shift in SRAS (Short-Run Aggregate Supply)?
Changes in production costs (e.g., wages, raw materials, energy), taxes, or productivity.
What is a positive supply-side shock?
SRAS shifts right (SRAS₁ → SRAS₂), leading to:
Higher real GDP (economic growth)
Lower price level
Reduced cost-push inflationary pressure
What is a negative supply-side shock?
SRAS shifts left (SRAS₁ → SRAS₃), leading to:
Lower real GDP
Higher price level
Increased cost-push inflation (may cause stagflation)
What is stagflation?
A situation with rising inflation and falling output, typically caused by a negative supply-side shock.
What causes a shift in LRAS (Long-Run Aggregate Supply)?
Improvements in productivity, education, infrastructure, technology, or increases in capital or labor supply.
How is LRAS shown in the Classical model?
As a vertical line at full employment (Yfe); shifts right only when productive capacity increases.
How is LRAS shown in the Keynesian model?
As a curve with three sections:
Horizontal: spare capacity
Upward-sloping: tightening resources
Vertical: full capacity
What does a rightward shift in Classical LRAS (LRAS₁ → LRAS₂) represent?
An increase in the economy’s productive potential due to supply-side improvements.
What are the effects of a rightward shift in LRAS in the Classical model?
Increase in potential output (Yfe → Yfe₂)
Lower cost-push inflation (more supply capacity)
Sustained economic growth
New full employment level
What causes LRAS to shift right in the Classical model?
Investment in capital
Technological advancement
Education and training
Improvements in infrastructure or efficiency
How does a rightward LRAS shift affect actual growth?
It allows actual output to increase sustainably without causing inflation, as AD catches up with new productive capacity.
Does a rightward LRAS shift always mean higher price levels?
No. If AD doesn’t rise along with LRAS, price levels may remain stable or even fall slightly due to reduced inflationary pressure.
