Unit 3: Aggregate Demand, Supply and Fiscal Policy

These flashcards cover key concepts from Unit 3 on Aggregate Demand and Supply, including definitions, outcomes of shifts in AD and AS, and the implications of fiscal policy.

What is the formula for Aggregate Supply (AS)?

AS = R + A + P, where R is resource prices, A is actions of the government, and P is productivity.

What is an inflationary gap?

When actual GDP is above potential GDP, leading to unemployment being less than NRU.

What indicates a recessionary gap?

Actual GDP is below potential GDP, resulting in unemployment greater than NRU.

What is the long-run equilibrium in economics?

It is the state where the economy is at full employment output.

What occurs in the long run if consumer spending decreases?

Wages and costs will eventually decrease.

What occurs to price level and output in the long run if consumer spending increases?

Price level increases and output stays the same.

What is stagflation?

Stagflation is characterized by stagnant economic growth, high unemployment, and high inflation.

What effect does an increase in government spending have on PL and output in the short-run?

PL and Q will increase.

What is the impact of an increase in productivity on aggregate supply?

It shifts the aggregate supply curve to the right.

What are the shifters of Aggregate Demand?

Changes in consumer spending, investment spending, government spending, and net export spending.

What happens to the economy during a negative supply shock?

It results in a recessionary gap, where PL may rise but output typically falls.

How do changes in wages affect Aggregate Supply?

Increases in wages generally shift the AS curve to the left, decreasing supply.

What can cause inflationary expectations?

Expectations of continued rising prices, leading to increased current demand.

What is the significance of the consumption function in economics?

It illustrates how changes in income affect consumer spending.

How does investment impact economic growth?

Investment in capital goods increases productive capacity, enhancing economic growth.

What is the long-run effect of a decrease in interest rates on investment?

It is likely to increase investment, stimulating aggregate demand.

What does the term 'shifters of Aggregate Supply' refer to?

Factors that can cause the supply curve to shift, such as resource cost changes, prices, and productivity.

What happens in the long run if wages are fixed and consumer spending rises?

Real wages would fall because the price level increases while nominal wages remain unchanged.