Macroeconomics Flashcards

Macroeconomic Equilibrium

  • The state of the economy is determined by the intersection of the aggregate demand and aggregate supply curves. Macroeconomic Equilibrium is the point where the AD and AS curves intersect, determining the equilibrium GDP level and average price level.

Aggregate Demand Curve

  • Summarizes the relationship between the average price level and the quantity of output that buyers demand. Inflation leads to an increased real interest rate, increasing the opportunity cost, which decreases aggregate demand.

Movements Along the Aggregate Demand Curve

  • Changes in the price level lead to movements along the aggregate demand curve. Higher price levels increase real interest rates, decreasing output demand, while lower price levels decrease real interest rates, increasing output demand.

Shifts in the Aggregate Demand Curve

  • The aggregate demand curve shifts due to changes in aggregate expenditure at a given price level. An increase in aggregate demand leads to economic expansion and inflation, while a decrease leads to recession and deflation or lower inflation.

Aggregate Demand Shifters

  • Factors influencing aggregate demand include consumption (increased wealth, consumer confidence), investment (GDP growth, business confidence), government purchases (spending bills), and net exports (global GDP growth, weaker Australian dollar).

Aggregate Supply Curve

  • Shows the relationship between the quantity of output supplied and the average price level. Higher output leads to higher prices, while lower output leads to lower prices.

Shifts in the Aggregate Supply Curve

  • The aggregate supply curve shifts due to changes in production costs. An increase in aggregate supply results in economic expansion and deflation, while a decrease results in recession and inflation.

Expansionary Fiscal or Monetary Policy

  • Shifts the aggregate demand curve to the right, increasing both output and the price level through output-induced interest rate cuts or boosts to government purchases.

Taylor Rule (Henderson-McKibbin-Taylor Rule)

  • CashRate−Inflation=NeutralRealInterestRate+1.5×(Inflation−2.5%)+OutputGapCash Rate - Inflation = Neutral Real Interest Rate + 1.5 \times (Inflation - 2.5\%) + Output Gap
    The RBA adjusts rates based on the gap between inflation and its target, and the output gap.

Long Run Aggregate Supply

  • In the long run, shifts in aggregate demand affect the price level but not output, yielding a vertical long-run aggregate supply curve.

Very Short Run Aggregate Supply

  • In the very short run, shifts in aggregate demand affect output but not the price level, with a horizontal very-short-run aggregate supply curve.

Short Run Aggregate Supply

  • Some suppliers adjust prices, resulting in an upward-sloping short-run aggregate supply curve.

Medium Run Aggregate Supply

  • More suppliers adjust prices, resulting in a steeper medium-run aggregate supply curve.

What Causes Business Cycles?

  • Theories include Real Business Cycle (variations in TFP), Keynesian (AS and AD shocks), and Austrian (credit cycles).

Rules vs Discretion (Should Policy Be Restrained?)

  • Restraints on policymakers are argued due to uncertainty and time inconsistency.

Uncertainty in Macroeconomic Policy

  • Policymakers face uncertainty and should be cautious, avoiding fine-tuning.

Time Inconsistency

  • Macroeconomic policy is a game between policymakers and the public, requiring strategies to establish credibility.

Establishing Credibility

  • Central bank independence and conservative central bankers can help manage time inconsistency.

Politics and Policy

  • Political cycles may influence macroeconomic policy, but evidence of manipulation is limited.