Module 6-Keynesian Short Run Aggregate Supply with LRAS & AD

What economic model explains recessions before the Great Depression?

The classical model, specifically the AD/LRAS Model.

What major economic event led to the development of the Keynesian model?

The Great Depression.

What are the key assumptions of the Keynesian model regarding prices?

Prices are sticky or rigid.

What are some sources of price rigidities in the Keynesian model?

Union contracts, menu costs, and slow adjustments.

In the Keynesian model, what determines output in the short run?

Aggregate Demand (AD) determines output.

In the Classical model, what determines output in the long run?

Long Run Aggregate Supply (LRAS) determines output.

What happens to prices in the long run according to the Keynesian model?

Prices rise due to demand exceeding sustainable production levels.

What are the determinants that can shift both short-run and long-run aggregate supply curves to the right?

Discoveries of new raw materials, increased competition, reduced trade barriers, fewer regulations, and increased labor supply.

What factors can cause a decrease in short-run aggregate supply?

Increased inflationary expectations, rising input prices, and increased wages.

What is an aggregate demand shock?

Any event that causes the aggregate demand curve to shift inward or outward.

What is an aggregate supply shock?

Any event that causes the aggregate supply curve to shift inward or outward.

What defines a recessionary gap?

When GDP is less than Long Run Aggregate Supply (LRAS).

What is the relationship between prices and real GDP when business investments fall?

Prices increase and real GDP decreases.

What are the two types of gaps analyzed in Keynesian economics?

Recessionary gap and inflationary gap.

What is the significance of the AD/AS model in this course?

It serves as the main model for understanding economic equilibrium.

What does the term 'sticky prices' refer to in Keynesian economics?

Prices that do not adjust quickly to changes in economic conditions.

What is the effect of increased training and education on aggregate supply?

It can shift both short-run and long-run aggregate supply curves to the right.

What is the implication of the Keynesian model on market self-regulation?

Markets may not be self-regulating due to price rigidities.

What is the expected outcome when there is an increase in exports in the short run?

Prices increase and real GDP increases.

What does the term 'menu costs' refer to in the context of price rigidity?

The costs associated with changing prices, which contribute to price stickiness.

How does increased competition affect aggregate supply?

It can lead to a rightward shift in both short-run and long-run aggregate supply curves.

What is the role of the price index in the Keynesian model?

It helps measure the level of prices in relation to real GDP.

What is the impact of increased input prices on short-run aggregate supply?

It causes a leftward shift in the short-run aggregate supply curve.

What does the acronym POLE refer to in the context of long-run growth?

It stands for the key factors that drive long-run economic growth.

What indicates a Recessionary Gap?

When GDP is less than Long-Run Aggregate Supply (LRAS).

What indicates an Inflationary Gap?

When GDP is greater than Long-Run Aggregate Supply (LRAS).

What happens to prices and GDP when exports increase?

Prices increase and real GDP increases.

What happens when wages rise in an economy with unchanged spending?

Prices increase and real GDP decreases.

What is the effect of an Economy Correction during a Recessionary Gap?

Inflation expectations and/or input prices fall, causing the Short-Run Aggregate Supply (SRAS) to shift right.

What is the effect of an Economy Correction during an Inflationary Gap?

Inflation expectations and/or input prices rise, causing the SRAS to shift left.

What caused the price level to fall and GDP to decrease between 2000 and 2001?

A leftward shift of the aggregate demand curve due to a drop in business spending.

What was the impact of the Oil Shock between Q1 2007 and Q4 2008?

The price level rose while real GDP fell due to a leftward shift of the short-run aggregate supply curve.

What does the Complex Aggregate Demand and Aggregate Supply Model illustrate?

It shows the effects of inflation, output growth, and employment in relation to aggregate demand and supply.

What happens if all three curves (AD, SRAS, LRAS) increase the same amount?

Economic growth and employment occur without inflation, though this scenario is not very realistic.

What occurs when AD increases less than LRAS but more than SRAS?

The price level increases, leading to inflation, while real GDP also increases but remains below potential.

What is the result of falling inflation expectations on SRAS?

SRAS increases more than AD and LRAS, leading to a decrease in the price level and an increase in real GDP.

How does the economy naturally return to long-run equilibrium after a short-run deviation?

Adjustments in technology, productivity, expected inflation, input prices, government spending, taxation, education levels, and consumption.

What is the GDP Implicit Price Deflator?

A measure used to adjust nominal GDP to reflect changes in price levels.

What does a leftward shift of the aggregate demand curve indicate?

A decrease in overall demand, leading to lower prices and GDP.

What is the significance of the Long-Run Aggregate Supply (LRAS)?

It represents the economy's potential output when all resources are fully employed.

What factors can cause Aggregate Demand to increase?

Increases in income, business spending, public goods, international growth, and money supply.

What can lead to inflation in the economy?

When the increase in Aggregate Demand outpaces the increase in Short-Run Aggregate Supply.

What is the relationship between SRAS and AD in the short run?

Relative magnitudes can lead to inflation if AD increases more than SRAS.

What does an increase in input prices typically cause in the economy?

It can lead to a leftward shift of the SRAS, resulting in higher prices and lower GDP.

What is the outcome of a leftward shift in the SRAS curve?

Higher price levels and lower real GDP.

What is the role of business spending in the economy?

It is a key component of Aggregate Demand that can influence overall economic performance.

What happens to the economy during a Recessionary Gap without intervention?

The economy may self-correct as prices fall and GDP increases back towards potential GDP.

What is the effect of increased business investment on the economy?

It typically shifts the Aggregate Demand curve to the right, increasing GDP.