Aggregate Demand, Supply and Modern Macroeconomics

These flashcards capture the key concepts of Aggregate Demand and Supply in Modern Macroeconomics as discussed in the lecture.

What do Classicals believe about government involvement in the economy?

Classicals believe that the government should stay out of the economy as much as possible.

What is Keynes' famous quotation regarding the long-run?

Keynes' famous quotation is: 'In the long-run, we’re all dead'.

What does Keynes argue about wages and prices?

Keynes argues that wages and prices are rigid (sticky) due to labor contracts and strategic firm behavior.

What is the 'paradox of thrift'?

The 'paradox of thrift' states that an increase in savings can hurt the economy in the short-run by reducing current consumption expenditures.

Why is the Aggregate Demand curve downward-sloping?

The Aggregate Demand curve is downward-sloping due to the wealth effect, interest rate effect, international effect, and the income multiplier effect.

What shifts the Aggregate Demand curve?

Factors that shift the AD curve include increases in foreign income, exchange rates, expectations, distribution of income, monetary and fiscal policies, and multiplier effects.

What is the nature of the Short-Run Aggregate Supply Curve (SRAS)?

The SRAS is upward-sloping, showing that real output increases as the price level increases.

What are the major causes for shifts of the SRAS?

Causes for shifts of the SRAS include changes in factor prices, inflationary expectations, productivity, and import prices.

What formula represents the relationship between price level, wages, and productivity?

Percentage change in the price level = Percentage change in wages - Percentage change in productivity.

Why are changes in factor prices and productivity critical for the SRAS?

Changes in factor prices and productivity are critical because they exert the most influence on the supply curve.