3. AD - AS Model
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27 Terms
AD curve
shows spending, slopes down
why does the AD curve slope down
people feel wealthy so interest rates drop encouraging borrowing and goods become cheaper
what happens in the wealth effect for AD curve
P rises, wealth decreases, results: C decreases
what does wealth effect show on the AD curve
shows how P effects consumption
what happens in the interest rate effect for AD curve
P rises, need more money to buy same goods, results: I decreases
what does interest rate effect show on the AD curve
shows how P effects investment spending
move along on AD curve
when everything is constant and price levels change
shift on AD curve
factors other then P that effect the AD curve
mian shifters on AD curve
changes in expectations
changes in wealth
macro policy
SRAS curve
shows relationship b/t price level and qaunity of output, slopes upward
why does the SRAS curve slope up
due to sticky wages and prices in the short run
move along on SRAS curve
everything is constant and price levels change
shift on SRAS curve
factors other then P that affect curve
main shifters on SRAS curve
changes in commodity prices
changes in nominal wage
changes in productivity
LRAS Curve
shows relationship b/t price level and real GDP, vertical
short-run equallibrium
where the AD and AS curves intersect
shocks
are unexpected events
demand shocks
mainly effects demand, shifting AD curve
supply shock
shifts SRAS curve
what happens when there is a postive supply shock
increase SRAS curve and shifts right
what happens when there is a negitive supply shock
decreases SRAS curve and shifts left
long-run equallibrium
when economy has fully adjusted and has a stable balance b/t supply and demand
2 types of output gaps
recessionary gap
inflationary gap
recessionary gap
economy operates below potential
inflationary gap
actual output is higher then potentail output
how the economy corrects itself in long run in response to demand shock
has flexible prices returning output to full employment
postive demand shock shifts curve to the left
negitive demand shock shifts curve to the right
how the economy corrects itself in long run in response to supply shock
has flexible wages
negitive supply shock shifts curve to the right
postives supply shock shifts curve to the left
Note 
Flashcards (49)