Principles of Economics - Module 8

Consider the AD AS model. What happens when there is an increase in consumption spending?

AD shifts right

Consider the AD AS model. What happens when there is an increase in accumulated capital?

LRAS & SRAS shift right

Consider the AD AS model. What happens when there is a decrease in the cost of production?

SRAS shifts right

Consider the AD AS model. What happens when there isa n increase in taxes?

AD shifts left

Consider the AD AS model. What happens when there is a decrease in interest rates?

AD shifts right

Consider the AD AS model. What happens when there is growth in human capital?

LRAS & SRAS shift right

Consider the AD AS model. What happens when resources are destroyed by a natural disaster?

LRAS & SRAS shift left

Consider the AD AS model. What happens when there is an increase in the price of oil?

SRAS shifts left

Consider the AD AS model. What happens when deregulation lowers the cost of production?

SRAS shifts right

Consider the AD AS model. What happens when Facebook reduces the productivity of labor?

LRAS & SRAS shift left

Consider the AD AS model. What happens when there is wages fall?

SRAS shifts right

Consider the AD AS model. What happens when exports increase?

AD shifts right

Consider the AD AS model. What happens when the price of oil decreases?

SRAS shifts right

What happens to equilibrium price and GDP when AD shifts left?

Price decreases and GDP decreases

What happens to equilibrium price and GDP when AD shifts right?

Price level increases and GDP increases

What happens to equilibrium price and GDP when LRAS & SRAS shift left?

Price level increases and GDP decreases

What happens to equilibrium price and GDP when LRAS & SRAS shift right?

Price level decreases and GDP increases

What happens to equilibrium price and GDP when SRAS shifts left?

Price level Increases and GDP decreases

What happens to equilibrium price and GDP when SRAS shifts right?

Price level decreases and GDP increases

When there is a recessionary gap do AD and SRAS cross to the left or the right of the LRAS?

To the left of LRAS

When there is an inflationary gap do AD and SRAS cross to the left or the right of the LRAS?

To the right of LRAS

Aggregate Demand

the total demand for final goods and services in an economy at a given time

What kind of gap is the economy experiencing when real GDP is greater than potential GDP?

Inflationary (or expansionary) gap

What kind of gap is the economy experiencing when real GDP is less than potential GDP?

Recessionary (or contractionary) gap

What are the components of AD?

consumption, investment, government spending, net exports

What are the three key reasons for the downward slope of the AD curve?

Wealth effect, interest rate effect, and foreign price effect.

wealth effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.

interest rate effect

occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand

foreign price effect

If prices rise in the US and stay the same elsewhere, US goods become relatively expensive. X goes down and M goes up.

Aggregate Supply (AS)

The total amount of goods and services that all the firms in all the industries in a country will produce at various price levels in a given period of time.

What is the slope of the short run AS curve?

SRAS is upward sloping.

Identify the key assumptions behind the upward sloping SRAS curve.

1. Prices of the factors of production are constant.

2. The stock of capital equipment is constant.

As prices rise, what happens to real wages in the short run?

Real wages fall

In the short run, what happens to the quantity of GDP supplied as prices fall.

As the price level falls, the quantity of GDP supplied decreases.