SRAS/LRAS

Question 1

What is the long run?

Answer 1

Period in which nominal wages (&mother input prices) are fully responsive to changes in price level

Question 2

What are nominal wages?

Answer 2

Current level

Question 3

What are real wages?

Answer 3

Inflationary adjusted

Question 4

What are the assumptions of the SRAS curve?

Answer 4

• initial price level is P1
• nominal wages have been established on the expectation that PL will persist
• PL is flexible both upward and downward

Question 5

Why is the SRAS curve positively sloped?

Answer 5

Nominal wages stay constant as PL changes

Question 6

Why is the LRAS curve a vertical curve?

Answer 6

Nominal wages eventually change by the same amount as the change in PL

Question 7

What happens with a leftward shift of the SRAS?

Answer 7

In the LR workers discover that their real wages have declined because of increased PL

Question 8

What happens with a rightward shift of SRAS?

Answer 8

Profits have fallen because PL decreases and wages don’t, this increases real wages

Question 9

Where is equilibrium in the extended AD-AS model?

Answer 9

Intersection of AD, LRAS, & SRAS

Question 10

What happens to the extended AD-AS model because of demand pull inflation?

Answer 10

• Short run: increase in AD1 to AD2 drives up PL and increases real output, investment spending and/or net exports increase. Demand pull inflation drives up PL & increases output.
• Long run: nominal wages rise and AS1 shifts left to AS2. Only PL rises

Question 11

When does cost pull inflation occur?

Answer 11

When SRAS shifts leftward from AS1 to AS2

Question 12

When does recession occur?

Answer 12

When AD shifts left from AD1 to AD2

Question 13

What is stagflation?

Answer 13

• Combo of recession and inflation

- leftward shift of SRAS from EQUILIBRIUM

Question 14

What does the Phillips curve show?

Answer 14

Cost-push inflation and the macro distinction between SR and LR

Question 15

What is the basic idea of the Phillips curve?

Answer 15

• the larger the increase in AD, the higher the rate of inflation and the greater the increase in real GDP
• high inflation= low unemployment
• low inflation= high employment

Question 16

What happens in the short run of the Phillips curve?

Answer 16

• if AD moves upward, PL rises and real GDP rises

- if AD moves downward, PL falls and real GDP falls

Question 17

What happens in the long run of the Phillips curve?

Answer 17

The actual PL equals the expected PL and output is at its potential output with unemployment at its natural rate.
-to compensate for higher that expected PL, labor shortages and dissatisfaction with lower real wages will lead to higher wages in the next round of negotiation

Question 18

Stagflation

Answer 18

Suggests that the Phillips curve shifted to a less desirable position that negates the trade off between inflation and unemployment
- may be caused by aggregate supply shocks

Question 19

Late 80s-90s oil prices

Answer 19

Creates a beneficial AS boost to the economy

Question 20

Stagflation shifts the SRPC (short run Phillips curve) to the

Answer 20

Right

Question 21

Supply siders

Answer 21

Manipulate the economy by enacting policies designed to stimulate incentives to work, save, and invest

Question 22

Transfer payments

Answer 22

Erode incentives to work (welfare, unemployment, disability)

Question 23

Some economists believe that tax cuts will likely cause demand pull inflation because

Answer 23

The cuts will stimulate AD and overwhelm the effect on AS

Question 24

Ladder curve

Answer 24

Shows the relationship between tax rates and tax revenues

Question 25

What is the target of supply siders?

Answer 25

Government regulation

Question 26

Reaganomics caused

Answer 26

Substantial deregulation, a 22% tax cut over 3 yrs, large decline in inflation and interest rates, long peace time expansion, surge in entrepreneurship, but savings dropped and productivity didn’t rise after 1983

Question 27

What is the short run?

Answer 27

Period in which nominal wages (&mother input prices) remain fixed as the price level changes