Tutorial sheet 3 Flashcards
(7 cards)
Discuss the shocks that can change a macroeconomic equilibrium.
Macroeconomic equilibrium can change due to demand-side shocks (like changes in consumer confidence or government spending/policy and interest rates ), supply-side shocks (like rising input costs or natural disasters or technological advances),
What (again) is a GDP gap? Identify (and name) the two gaps that may exist in the short
run and explain the difference between them. Which one would you choose to analyze the macro economy?
The GDP gap is the difference between actual GDP (Y) and potential GDP (Y*).
Recessionary gap: Y < Y* → economy is underperforming, high unemployment
Inflationary gap: Y > Y* → economy is overheating, rising prices
focus on the recessionary gap to analyze the macroeconomy ‘cause it shows when the economy needs help the most
What is fiscal policy? explain how fiscal policy can be used
to eliminate a GDP gap. Discuss the impact on inflation and unemployment and the element of time involved (lags)
Fiscal policy is the use of government spending and taxation to influence the economy.
To close a recessionary gap, the government can increase spending or cut taxes to boost demand and reduce unemployment.
To close an inflationary gap, the government can cut spending or raise taxes to reduce demand and control inflation. Fiscal policy affects unemployment and inflation because when the government spends more or cuts taxes (expansionary policy), it increases demand, which encourages businesses to hire more workers, reducing unemployment — but this can also push prices up, leading to inflation.
What is a “stimulus package”? . Explain the impact of an economy on a stimulus package.
A stimulus package is the government’s way of injecting money into the economy to boost spending, reduce unemployment, and avoid a deeper recession, examples are tax cuts, direct financial assistance and increased gov spending on things like healthcare. But if it’s not handled well, it could also lead to inflation or worsen national debt.
Compare and contrast the Aggregate Expenditure and the Aggregate Demand curves
The Aggregate Expenditure (AE) curve shows total spending (by households, businesses, government, and foreigners) at different levels of output (GDP), and it typically slopes upward—more income leads to more spending. On the other hand, the Aggregate Demand (AD) curve shows total demand for goods and services at different price levels, and it slopes downward—lower prices increase the quantity of demand. While AE focuses on spending at different output levels in the short run, AD looks at how price levels affect demand in the long run. Both curves represent the economy’s equilibrium but from different perspectives: AE is about how much we’re spending, and AD is about how much we’re demanding at various prices.
Compare and contrast the Short Run Aggregate Supply curve and the Keynesian Short
Run Aggregate Supply curve.
The regular SRAS curve is upward sloping, meaning that as prices rise, businesses produce more. It’s based on the idea that in the short run, input prices are fixed. The Keynesian SRAS curve starts off horizontal at low levels of output, meaning businesses can increase output without raising prices when there’s spare capacity. As the economy nears full capacity, it becomes upward sloping and eventually vertical when the economy reaches its full potential, signaling that any further output increase will lead to inflation.
Compare and contrast the Short Run Aggregate Supply curve and the Long Run
Aggregate Supply curve.
The SRAS curve is upward sloping because, in the short run, higher prices can encourage more output as businesses adjust. But it’s only for a short period where wages and input prices are sticky. The LRAS curve is vertical because, in the long run, output is driven by the economy’s full capacity (resources and technology), and price levels don’t influence how much the economy can produce.
