Macroeconomics chapter 11

Flashcards based on Macroeconomics Chapter 11 lecture notes focusing on Classical and Keynesian Macro Analyses.

Say's Law

Supply creates its own demand; producing goods and services generates income to purchase other goods and services.

Classical Model Assumptions

Pure competition, flexible wages/prices/interest rates, self-interest motivation, and no money illusion.

Equilibrium in the Credit Market (Classical Model)

Occurs when the amount of credit demanded by businesses equals the amount supplied by consumers at the equilibrium interest rate.

Equilibrium in the Labor Market (Classical Model)

Wages adjust so there are no shortages or surpluses of labor; unemployment equals the natural unemployment rate.

Keynesian Economics

Wages and prices are inflexible (sticky) downward; changes in demand cause changes in output, not prices, in the short run.

Demand-Determined Real GDP (Keynesian)

Real GDP is determined by demand when the SRAS curve is horizontal; an increase or decrease in AD does not change the price level.

Keynesian SRAS Curve

The horizontal portion of the AS curve where there is excessive unemployment and unused capacity.

Modern Keynesian Analysis

Prices are not totally sticky; as the price level rises, real GDP can increase beyond full employment in the short run, and the SRAS curve is upward sloping.

Shifts in Both SRAS and LRAS

Caused by a permanent change in factors of production or technology (increase shifts curves rightward, decline shifts curves leftward).

Factors that Increase SRAS (Shift Rightward)

Increased competition, reduced international trade barriers, fewer regulatory impediments, increased training/education, decreased marginal income tax rates, reduction in input prices.

Recessionary Gap

Exists when equilibrium real GDP is less than full employment real GDP based on the LRAS curve; caused by a decrease in AD.

Inflationary Gap

Exists when equilibrium real GDP is greater than full employment real GDP based on the LRAS curve; caused by an increase in AD.

Demand-Pull Inflation

Inflation caused by increases in aggregate demand.

Cost-Push Inflation

Inflation caused by decreases in short-run aggregate supply.