ECON 1010 Exam 4 Practice - ASAD Model

Vocabulary practice flashcards based on the Dr. Fiegenbaum ASAD Practice for Exam 4 covering the AS-AD model, market shocks, and the Federal Reserve's mandate.

Long-run Economy Output

In the long run, the economy’s output is determined by the natural level of output.

Consumer Confidence Decrease

A factor that most directly causes a leftward shift of $AD$.

Rightward $SRAS$ Shift Factor (Mankiw’s model)

Typically caused by lower expected price levels and falling wages over time.

Short-run $SRAS$ Leftward Shift

Leads to lower output and higher prices.

Recession

Occurs when actual output is below natural output and unemployment rises above the natural rate.

Long-run Natural Output Return

The process by which the economy returns to its natural output because wages and prices adjust.

Short-run $AD$ Rightward Shift

Leads to higher output and a higher price level.

Long-run $AD$ Rightward Shift Effect

Causes no change in output as the economy returns to its natural level.

Negative Demand Shock

A leftward shift of $AD$ that causes a recession in the short run.

$LRAS$ Curve

A vertical curve that represents the economy’s maximum sustainable output.

Expected Price Levels

Economic variables that primarily influence the $SRAS$ curve only.

Stagflation

A condition typically caused by $SRAS$ shifting left, characterized by rising prices and falling real $GDP$.

Rightward $LRAS$ Shift Factors

Improvements in technology are a primary cause for shifting this curve to the right.

Positive Demand Shock Adjustment Sequence

A sequence where $AD$ shifts right first, and then $SRAS$ shifts left over time to return to natural output.

Supply Shock (Drought Scenario)

A temporary decrease in production that causes the overall price level to rise, real $GDP$ to fall, and unemployment to rise.

Long-run Supply Shock (Non-intervention)

If the government does not intervene after a supply shock, the price level, $GDP$, and unemployment return to their original places.

Government Spending Bailout (Recession)

The use of (more) government spending during a recession to cause the overall price level to rise, real $GDP$ to rise, and unemployment to fall.

Dual Mandate of the Federal Reserve

The specific goals to maximize employment and stabilize prices.

Federal Reserve Stagflation Challenge

A policy dilemma where monetary policy can only solve stagnation by worsening inflation.