Aggregate Demand and Supply Model & Business Cycles

A collection of flashcards summarizing key concepts from the lecture on the Aggregate Demand and Supply Model and business cycles.

What is the key difference between short-term economic fluctuations and long-term economic growth?

Short-term fluctuations, known as business cycles, include periods of booms and busts, whereas long-term growth shows a general upward trend in GDP.

How is GDP calculated according to the expenditure approach?

GDP (Y) is calculated as Y = C + I + G + X - M, where C is household consumption, I is investment, G is government expenditure, X is exports, and M is imports.

What is the relationship between the price level and household consumption?

There is a negative relationship; as the price level rises, household consumption decreases.

What characterizes the short run aggregate supply function (SRAS)?

It is positively related to the price level due to sticky nominal wages.

What is expansionary fiscal policy?

An increase in government expenditure to boost aggregate demand.

What is crowding out in the context of fiscal policy?

When increased government expenditure raises interest rates, leading to a decrease in private consumption and investment.

What does the multiplier effect refer to?

The process by which an initial increase in spending leads to a larger overall increase in economic output.

What occurs during a positive aggregate demand shock?

An increase in aggregate demand leads to higher output and price levels in the short run.

What is the self-correction mechanism in economics?

The process by which adjustments in nominal input prices return the economy to full employment output after a shock.

What effect did the Covid pandemic have on the economy according to the lecture?

It caused a leftward shift in the short run aggregate supply function, leading to reduced output and increased prices.

What might stabilization policy aim to do in reaction to a recession caused by external shock?

Shift the aggregate demand function to the right using fiscal or monetary policies to stimulate the economy.

What was John Maynard Keynes' view on economic recovery during a depression?

He believed that waiting for the self-correction mechanism could be harmful, advocating for policy measures to expedite recovery.

What are the limitations of stabilization policy?

Consensus on recessions often occurs too late, and time delays in legislation and policy execution may hinder timely responses to economic downturns.