Macro Chapter 21-22

What are short run and long run variables?

They refer to how quickly economics variables can adjust

What does "short run" mean in economics?

Within a time period at least one variable will not have time to change and be fixed

What does "long run" mean in economics?

Within a time period all variables will have time to change

What is LRAS an abbreviation for?

Long-run aggregate supply

What is SRAS an abbreviation for?

Short-run aggregate supply

What does an increase in product prices incentivise firms to do?

Produce more goods

What does a decrese in product prices cause firms to do?

Reduce production or employment

What are input prices?

Costs businesses pay for factors of production needed to make a product

What are output prices?

Final amount a business recieves when selling finished goods or services

What shifts short-run aggregate supply?

Changes in input prices, wages, technology

What does a low GDP mean for aggregate supply?

Aggregate supply can increase quickly when prices change

What does a high GDP mean for aggregate supply?

As economy approaches full capacity increasing production becomes difficult

What happens to the aggregate supply curve when GDP is high?

It becomes nearly vertical since production is approaching its limit

What does full employment GDP refer to?

Potential GDP

When can an economy produce above potential GDP?

When unsustainable measures are put into place that involve producing a good nonstop

What is it called when an economy produces above its potential GDP?

A positive output gap

Why is the long-run aggregate supply curve vertical?

Since, in the long run all wages, prices, and input costs have time to adjust completely, making it a representation of maximum output

What is productivity?

Measures amount of output that can be producded with a given amount of labour

What does an increase in productivity mean?

It means workers can produce more goods and services with the same resources

What are common input prices?

Wages, Energy, Goods used in production

What is stagflation?

High inflation, Slowing economic growth, and high unemployment happen at the same time

What shifts short-run aggregate supply to the right?

Higher productivity, Lower input prices

What shifts short-run aggreagate supply to the left?

Lower productivity, Higher input prices

What is the price level?

The average price of all final goods producded in the economy

What does the sticky wage theory suggest?

the wage rate and other input prices are determined before the prices of goods produced are observed.

What is the aggregate supply model?

Shows total amount of goods/services that firms produce at different price levels

What does real GDP represent on the aggregate supply model?

Quantity of Output

What does a change in price level cause on the aggregate supply model

Movment along short run aggregate supply curve

What does a downward shift indicate on aggregate supply model?

Means firms are able to supply more goods at all price levels

What does a upward shift indicate on the aggregate supply model?

Means firms can not supply as many goods at all price levels

What does an increase in the price level do?

Reduces purchasing power

What does a decrese in the price level do?

Increases purchasing power

What does the price level reflect?

Output prices

What are fluctuations in the economy called?

The business cycle

What is an economic contraction?

Period of time where economic output declines

What is an economic recession?

Sustained decline across entire economy for multiple months

What does real GDP indicate interms of the business cycle?

Whether the economy is expanding or contracting

Important indicators of a recession?

Decline in Income, Spending, Investment, Production, Employment, Building Permit Applications

What is a self-reinforcing cycle in economics?

Feedback loop where initial economic action(s) triggers a continous compounding cycle

What accounts for large shares of GDP decline in a recession?

Investment

How does unemployment rise during recessions?

Businesses lay off workers which reduces public spending which causes businesses to lay off more workers

What does long term GDP allow economists to do?

Monitor long term economic growth

What is annualized GDP growth rate?

Quartarly growth is multipled by four to show growth rate would be if it continued for a year

What is a peak in the business cycle?

Highest point of economic activity before a recession

What is a trough in the business cycle?

Lowest point of a recession before recovery begins

What is a contraction in terms of the business cycle (graphed)?

Time between a peak and a trough

What is an expansion in term of the business cycle (graphed)?

Period from a trough to a peak

What is the national bureau of economic research (NBER)

Institution that tracks the business cycle

What does the NBER do?

Identifies peaks and troughs in bussiness cycle and determines official recession dates

What is the output gap?

Measures difference between actual and potential GDP

What is actual output another name for?

Real GDP

What is potential output another name for?

Potential GDP

How to calculate output gap?

[(Actual output - Potential output) / potential output] * 100

What does the output gap tell economists?

Where economy is in business cycle

Which expenditure category remains the most stable or increases during recessions?

Government purchases

Which expenditure category takes up the largest share of potential GDP?

Consumption, 70% of total economic activity

What is the S&P 500 index of stock prices?

Stock market index tracking 500 of the largest publicly traded companies in the U.S.

What happens to stock prices before a recession?

tend to decline

What happens to bussiness inventories during a recession?

Business inventories increase during a recession as consumption falls