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E202 Ch 12
Exam 2
30
Economics
Undergraduate 2
10/19/2011

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Term
Aggregate demand and aggregate supply model
Definition
used to explain fluctuations in real GDP and the price level
Term
Aggregate Demand Curve
Definition
shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government
Term
Short-run aggregate supply curve
Definition
shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
Term
Why is the AD curve sloping downward
Definition
because a fall in the price level increases the quantity of real GDP demanded
Term
The wealth effect
Definition
The impact of the price level on consumption
Term
The Interest-Rate Effect
Definition
The impact of the price level on investment
Term
The International-Trade Effect
Definition
The impact of the price level on net exports.
Term
Shift along the AD curve
Definition
If the price level is the only thing that changes then we will see a shift on the AD curve
Term
Three causes that shift the AD curve
Definition
1 Changes in government policies
2 Changes in the expectations of households and firms
3 Changes in foreign variables
Term
Monetary Policy
Definition
involves the actions of the Federal Reserves takes to manage the money supply and interest rates and to ensure flow of funds from lenders to borrowers
Term
Fiscal Policy
Definition
involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives
Term
Changes in gov't policies and AD
Definition
any changes in monetary and fiscal policy
Term
Changes in the Expectation of Households and Firms and AD
Definition
If they become more optimistic then more demand. If the reverse then less demand
Term
Changes in foreign variables and AD
Definition
An increase in net exports at every price level will shift the AD curve to the left.
Term
Long Run Aggregate Supply Curve
Definition
shows the relationship in the long run between the price level and the quantity of RGDP supplied
Term
Why are some firms slow to adjust their prices?
Definition
1 Contracts make some wages and prices sticky
2 Firms are often slow to adjust wages
3 Menu costs make some prices sticky
Term
5 Variables that cause the SRAS curve to shift
Definition
1 Increase in the labor force and in capital stock
2 Technology change
3 Expected changes in the future price level
4 Adjustments of workers and firms to errors in past expectations about the price level
5 Unexpected changes in the price of an important natural resource
Term
Increase in the labor force and in capital stock and SRAS
Definition
As this grows the firm will be able to supply more goods
Term
Technological change and the SRAS
Definition
as technology gets better more can be produced per unit of capital therefore increasing production
Term
Adjustments of workers and firms to errors in past expectations about the price level and the SRAS
Definition
If they are adjusting to the price level being higher than expected, the SRAS curve shift to the right
Term
Unexpected changes in the price of an important natural resource and SRAS
Definition
if the price of a supply goes up the SRAS curve shifts to the left.
Term
Supply Shock
Definition
an unexpected event that causes the SRAS curve to shift
Term
Recession
Definition
the short run effect of a decline in AD
Term
Adjustment back to equilibrium after recession
Definition
suppliers will start to pay lower wages and supply will increase causing equilibrium
Term
Automatic mechanism
Definition
the adjustment of the economy back to equilibrium without the aid of the gov't.
Term
Stagflation
Definition
the combination of inflation and a recession
Term
Supply Shock
Definition
if oil prices increase substantially then the supply curve shifts to the left, causing a temporary recession
Term
Expansion
Definition
the short run effect of an increase in AD
Term
Adjustment back to equilibrium after expansion
Definition
since prices will be higher employees will demand higher wages and the SRAS will move to the left drawing it back into equilibrium
Term
Adjustment to Equilibrium after a supply shock
Definition
eventually the workers will begin to except lower wages and the supply curve will fix itself
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