Week 8 - AS-AD Model Flashcards Preview

Macroeconomics 1 > Week 8 - AS-AD Model > Flashcards

Flashcards in Week 8 - AS-AD Model Deck (31):

What is Say's Law

Classical economists clam that whatever is produces would be consumed (mainly due to the circular flow)


What does Keynes say about Say's Law

Keynes argues that supply is largely driven by the expected extent of future demand, if suppliers mis estimate future AD it is possible some output may be unconsumed


What does the as-ad model do?

Attempts to explain short-run fluctuations in real GDP and the price level. The AD curve shows the price level and quantity of real gdp demanded in the economy (AS shows this supplied). This relationship between nominal prices and real output violates the classical dichotomy.


Why does the As-ad model violate the classical dicothomy>

There is a relationship between nominal prices and real output. It is a short-run model where lags and rigidities in adjustment lead to nominal quantities having real effects


Factors that mead the demand curve has a negative slope?

1) wealth effect (change in price level affects real wealth and consumption)
2) interest rate effect (change in price level affects real interest rate and investment)
3) international trade effect (change in price level impacts relative price of foreign and domestic goods and net exports)


What does a movement along the AD curve show

a movement holds everything constant and shows what real GDP will be given different possible price levels as driven by the components of AE and how these are affected by prices


Impact of higher interest rates on AD

shift to the left as cost of borrowing rises, reducing C and I


Impact of higher gov purchases on AD

Shift to the right as G is a component of AD


Impact of higher taxes on AD

shift to the left as C falls with higher income tax and I falls with companty tax


Impact of better household income expectations on ADq

Shift to the right as consumption increases


Impact of better firm expectations of profitability on AD

Shift to the right as investment increases as they believe it will be more profitable


Impact of higher relative domestic growth on AD

Shift to the left as exports fall


Impact of a higher exchange rate on AD

Shift to the left as imports increase and exports fall


What can shift the long run aggregate supply curve?

Vertical line at potential GDP can shift with the labour force, amount of machinery and equipment or technology


Why is the SRAS upwards sloping?

firms produce more in response to higher prices. This is because input prices typically rise slower than final prices (due to sticky wages and prices, firms being slow to adjust wages and menu costs)


What is the money illustion

People misread inflation in the short run leading to a temporary illusion as to the real value of money. Firms will invest more if they think inflation is lower


Why are wages sticky and relationship to output?

contracts and social conventions.
If actual inflation is less than expected, output falls as real wages are higher. Inflation is associated with higher output.


Why are prices stick and relationship to output?

Some goods have long-term contracts or complex pricing schemes. If inflation is higher than expected, real prices are lower stimulating demand and output.


Impact of higher labour force or capital stock on AS

Shift to the right as more output can be produced at each price level (same for resources)


Impact of higher productivity on AS

Shift to the right as costs of producing each unity of output falls


Impact of higher expected future price level on AS

shift to the left as costs of producing rise


Impact of workers/firms adjusting to previously underestimated price level?

Shift to the left a workers are firms increase wages and prices


Impact of higher expected price of an important natural resource

Shift to the left as costs of producing increase


What is equilibrium in the AD-AS model

place where LRAS, SRAS and AD intercept. Actual output is equal to LR potential output and there if full employment and no underutilised capacity.


Neo classical and Keynes aspects of AS-AD model

Assumed long run equilibrium will always hold (NC) but short run deviations possible (K)

Money is neutral in long run (NC) but nor in short run (K)

Both supply and demand determine output (K) but only supply determines long run output (NC)

Economic agent expectations have short run implications for output and prices (K) but not in long run (NC)


What is the y intercept in the Ae model

autonomous consumption


Difference between micro demand and aggregate demand

Micro demand relates to the willingness to pay for an individual good from individual curves. AD relates to AE and the price level on an economy wide level


Why is SRAS sloping

money is not neutral in the short run. Higher prices mean firms tend to produce more as they receive more (wages and capital are sticky). In the long-run, firms must adjust these and producing more or less won't change anything


Difference between micro and aggregate supply

From the micro point of view, supply is the marginal cost curve rather than relating to the price of L and K


Define demand inflation

higher demand result in a rightwards shift in AD. This results in higher inflation and higher output. E.g. the mining boom


Define cost inflation

Higher production costs lead to SRAS shifting left, higher inflation and lower output.