Economics: Real GDP and Price Level in the Long Run

These flashcards cover key concepts from the lecture notes on real GDP, price levels, and aggregate supply in the long run, aimed at aiding in exam preparation.

What resources make Iceland an ideal location for data centers?

Chilly temperatures and steam from rocky vents.

What is the effect of economic growth on long-run aggregate supply (LRAS)?

Economic growth results in an increase in LRAS.

Define long-run aggregate supply (LRAS).

A vertical line representing the real output of goods and services after full adjustment has occurred.

What does the LRAS curve represent under conditions of full employment?

The real GDP of the economy.

What determines the LRAS?

Endowments and technology.

List the factors that can cause shifts in the LRAS curve.

Growth of population, labor force participation, capital accumulation, improvements in technology.

What is the aggregate demand (AD) curve?

A curve showing planned purchase rates for all final goods and services at various price levels.

Why does the aggregate demand curve slope downward?

Due to the real-balance effect, interest rate effect, and open economy effect.

What occurs when the price level rises according to the real-balance effect?

The real value of money balances decreases, reducing expenditures.

Explain the interest rate effect.

Higher price levels increase interest rates, reducing borrowing and spending.

What is the open economy effect?

Higher price levels lead to decreased net exports due to less demand for domestic goods by foreigners.

What causes a rightward shift of the AD curve?

Any non-price-level change that increases aggregate spending.

What happens in long-run equilibrium?

The price level adjusts until total planned expenditures equal actual real GDP.

Define secular deflation.

A persistent decline in prices resulting from economic growth with stable aggregate demand.

What is the effect of an increase in LRAS on the price level?

Ceteris paribus, an increase in LRAS leads to a decrease in the price level.

What shifts the AD curve outward?

Increasing the money supply.

What does a decline in LRAS lead to regarding inflation?

It can cause supply-side inflation due to increased price levels.

What is demand-side inflation?

An increase in AD for a given level of LRAS that causes the price level to rise.

What are determinants of aggregate demand?

Factors causing increases or decreases in spending, like money supply, job security, and international conditions.

Describe the impact of tax reduction on AD.

A tax reduction combined with improved job security generates a rightward shift in AD.

What contributes to Japan's goal of increasing LRAS?

Reducing long working hours to improve productivity per hour worked.

What is the role of AI in long-run economic growth according to the lecture?

Governments are investing in AI techniques to create infrastructure for private investment and economic expansion.

What is shown by outward shifts of the production possibilities curve and LRAS curve?

Economic growth.

What impacts inflation rates in the Eurozone according to the lecture?

Lower growth in money circulation and higher real GDP growth.

What is the significance of the natural rate of unemployment for LRAS?

At LRAS, unemployment is at the natural rate, where input prices adjust fully to output prices.

What illustrates a decline in long-run aggregate supply?

A leftward shift of the LRAS curve.

How does economic growth relate to deflation in this context?

Economic growth can cause deflation if AD remains stationary while LRAS shifts outward.

What does a higher marginal tax rate on wages potentially lead to?

Supply-side inflation through a leftward shift of the LRAS.

What happens to net exports when US price levels rise?

Net exports fall as Americans buy more foreign goods and foreigners buy fewer American goods.

What happens to aggregate demand when economic conditions deteriorate abroad?

Aggregate demand decreases.

What did the U.S. economy experience in recent years according to the lecture?

Increases in aggregate demand due to tax reductions and improved job security.

How can the economy avoid secular deflation despite economic growth?

By shifting the AD curve outward by the same amount as the LRAS curve.

List the factors leading to variations in real GDP growth.

Aggregate supply and aggregate demand tools.

What method can a government employ to stimulate economic growth?

Investing in infrastructure and technology improvements.

What characterizes an increase in labor force participation in affecting LRAS?

It contributes to the growth and upward shift of LRAS.

What defines the long-run economywide equilibrium according to the lecture?

It occurs when the AD curve crosses the LRAS curve.

Summarize why Iceland's economy is experiencing growth rates.

Abundant resources for data centers have increased real GDP and LRAS.

Identify a major contributor to persistent inflation over the decades according to the lecture.

Decline in LRAS while AD growth exceeds LRAS growth.

What is the significance of the base-year dollars?

It allows for current sums to be expressed in terms of historical prices.

What is the relationship between capital accumulation and LRAS?

Capital accumulation can cause shifts of the LRAS curve outward.

Describe how governments perceive economic growth initiatives.

They invest in public-sector growth initiatives to stimulate long-run aggregate supply.

What does a forward shift in both the LRAS and AD curves imply for the price level?

The price level remains constant if both curves shift equally.