Term
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Definition
| A dictum of economist J. B. Say that supply creates its own demand. Producing goods and services generates the means and the willingness to purchase other goods and services. |
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Definition
| Reacting to changes in money prices rather than relative prices. |
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Term
| Keynesian short-run aggregate supply curve |
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Definition
| The horizontal portion of the aggregate supply curve in where there is excessive unemployment and unused capacity in the economy. |
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Term
| short-run aggregate supply curve |
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Definition
| The relationship between total planned economy wide production and the price level in the short run, all other things held constant. If prices adjust incompletely in the short run, the curve is positively sloped. |
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Term
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Definition
| Any event that causes the aggregate demand curve to shift inward or outward. |
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Term
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Definition
| Any even that causes the aggregate supply curve to shift inward or outward. |
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Term
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Definition
| The gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the long-run aggregate supply curve. |
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Term
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Definition
| Inflation caused by increases in aggregate demand not matched by increases in aggregate supply. |
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Term
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Definition
| Inflation caused by decreases in short-run aggregate supply. |
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Term
| In the classical model, the equilibrium level of real GDP per year is completely determined by what? |
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Definition
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Term
| In the Keynesian model, the equilibrium level of real GDP per year is completely determined by what? |
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Definition
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Term
| What is a possible explanation for sticky prices? |
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Definition
| Labor wages cause wages to be fixed over the contract period. |
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Term
| Why does the Keynesian model argue that prices are sticky? |
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Definition
| Nominal wages are inflexible downward, meaning labor contracts prevent nominal wages from falling. |
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Term
| Keynesians believe that the aggregate supply is _____________________. |
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Definition
| horizontal in the short-run |
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Term
| Are prices sticky or flexible in the Classical Model? |
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Definition
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Term
| Which model suggest that the economy will always be at full-employment? |
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Definition
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Term
| If prices are sticky, what does that imply about short-run aggregate supply? |
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Definition
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Term
| How to prices respond to changes in aggregate demand in each model? |
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Definition
| Classical: fully. Keynesian: respond but not fully. |
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Term
| What does the aggregate supply curve look like in each model? |
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Definition
| Classical: vertical. Keynesian: upward sloping. |
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Term
| How could one explain the shape of the upward-sloping short aggregate supply curve by only focusing on profits? |
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Definition
| Firms are able to earn higher profits as long as the price level increases and nominal wage rate stays the same. |
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Term
| What three things determine the extent that real GDP responds to changes in the price level along the SRAS? |
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Definition
(1) The speed with which input prices adjust and people become more informed.
(2) The ability of firms to use existing capital and workers more intensively.
(3) The ability of firms to hire additional inputs, particularly workers. |
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Term
| What does not cause a change in the LRAS? |
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Definition
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Term
| What causes cost-pull inflation? |
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Definition
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Term
| What causes demand-pull inflation? |
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Definition
| Depreciation of US money. |
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Term
| When does persistent inflation occur? |
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Definition
| When the aggregate demand curve increases by a larger proportion than the LRAS. |
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Term
| What direction does the AD shift when there is depreciation? |
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Definition
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Term
| What direction does the SRAS shift when there is depreciation? |
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Definition
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