Economics 3

what shape does the aggregate supply curve look like?

a curved shape due to cost pressure intensifying as capacity is approached

macro equilibrium

occurs when price levels and output combo is compatible with both buyers/sellers intentions

what happens during macro disequilibrium

the market will adjust itself

what does equilibrium establish?

the only level of prices/outputs that are compatible with current AD/AS curves. if equilibirum output is not equal to full employment output, the macro outcomes may not meet policy goals

will macro equilibrium persist?

no, the business cycle will have AD/AS to shift when the economy behaviors of buyers/sellers change

what causes AD to shift?

changes in consumer confidence, income, wealth, consumer taxes, interest rates, and external shocks

what causes AS to shift?

cost production, business taxtes, environmental/workplace regulations, immigration rules, and external shocks

what framework does the AD/AS curve provide?

helps compare how different theories on the economy works

what did classical economists assert?

supply creates its own demand

what did keynesian theory assert

it’s observed during the great depression that too little AD will cause the economy to contract, raising unemployment. Too much AD will cause the economy to expand, raising inflation. Keyne’s emphasizes that someone needs to intervene to shift AD and restore full employment

monetary thoery

emphasizes the role of money in financing aggregate demand. Money and credit affect the ability/willingness of people to buy goods/services. Loose money supply/low interest rates increase AD. Tight money supply/high interest rate decreases AD. Monetary theorists focus on the control of money and interest rates

fiscal policy

the use of government taxes and spending to alter macro economic outcomes. An increase in government spending on goods/services increase a cut i taxes which stimulates consumer spending and increases AD

supply side policy

the use of tax rates, (de)regulation, and other mechanisms to increase the ability/willingness to produce goods/services. Essentially focusing on policies to shift AS to restore full employment. Examples: cutting corporate taxes + giving special tax incentives for new investment. Subsidies to higher education and government sponsors etc.

can aggregate supply cause downturns as well?

Yes. Rising costs across industries, resource shortages, natural/terrorist disasters, and changes in government regulations/taxes etc.

What 3 policy options does the government have?

1. shift the AD curve using fiscal or monetary policy: finding and using policy levers to stimulate or restrain total spending

2. shift AS curve using supply side policy: find and implement policy levers that reduce cost of production or otherwise stimulate more output at every price level

3. do nothing if we cant identify/control determinants of AS/AD

sticky prices

most prices are sticky in the short run due to consumers preferring stable prices and firms wanting to avoid price wars. Sticky prices are inflexible prices

are prices flexible in the long run?

Yes!