Term
| Aggregate Demand-Aggregate Supply (AD-AS) Model |
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Definition
| uses variation of the traditional supply-demand format to explain both long and short run movements in real GDP |
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Term
| Characteristics of Aggregate Demand-Aggregate Supply Model |
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Definition
*two of the 3 key macroeconomic goals (economic growth and stable prices) are reflected by the graph's axes
*the other keygoal (low unemployment) can be inferrred from the positive of actual GDP relative to potential GDP |
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Term
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Definition
*"the value of real GDP in all the economy's factors of production...area fully employed."
*the AD-AS model marks the position of potential GDP in any given year witha vertical (perfectly inelastic) line |
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Term
| Slope of the Potential GDP Curce |
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Definition
*perefectly inelastic (vertical)
*this characteristic implies changes in potential output are independent of changes in the price level
*the position of the potential GDP curve simply serves as a bookmark (ie: it indicates the position of potential GDP in any give year) |
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Term
| Forces that SHIFT the Potential GDP Curve |
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Definition
*3 forces that increase potential GDP in the long-run
-->increases labor force
-->incraeses capital stock
-->improvements in technology
*these forces change only slowly over time, so we assuem the potential GDP curve moves rightward at an annual rate of 3% |
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Term
| Explaining Short-Run Movements in Actual GDP |
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Definition
| *caused by changes in aggregate supply (AS) and aggregate demand (AD) |
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Term
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Definition
| *the relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same |
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Term
| Rason for the AS Curve's Positive Slope |
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Definition
*the curve's positive slope indicates producers thin out more output in the short run as the price level increases
*this reaction implies a higher price level is associated with higher producer profits
*in order for a higher price level to generate higher profits, producers must be able to raise the prices of the goods and services they sell (reflected by the price level) faster than their costs increase |
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Term
| Reasons Why Costs Tend to Rise More Slowly than Prices |
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Definition
*long-term contacts with suppliers
*inventories
*incomplete knowledge by workers
*fear of unemployment by workers |
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Term
| Long-Run Forces that Shift the AS Curve |
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Definition
*anythihng that shifts the potential GDP curve rightward also shits the AS curve rightward
-->increases in labor force
-->increases in capital stock
-->increases in technology |
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Term
| Short Run Forces that Shift the AS Curve |
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Definition
*changes in resource prices (changes in money wage rates and changes in money prices of other resources)
*only shift the AS curve
*inversely related to AS
*an increase in resource prices shifts the AS curve leftward
*a decrease in resource prices shifts the AS curve rightward |
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Term
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Definition
*the relationship between the quanitiy of real GDP demanded and the price level when all other influences on expenditure plans remain the same
*AD consits of planned spending by all sectors of the economy
*AD = C+I+G+X-M
*C-planned consumption
*I-planned investment
*G-planned government
*X-planned exports
*M-planned imports |
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Term
| Reasons for the AD Curve's Negative Slope: The Buying Power of Money |
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Definition
| *and increase in the price level decreases the purchasing power of monetary wealth (eg: savings accounts) & decreases consumer spending (C) |
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Term
| Reasons for the AD Curve's Negative Slope: The Real Interest Rate |
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Definition
*an incrase in the US price level tends to also increase on real interest rates & decrease consumption (C), investment (I), & net exports (X-M)
*an increase in the US price level makes foreign-produced goods relatively cheaper to US buyers, which increases our imports (M) |
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Term
| Things that Shift the AD Curve |
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Definition
*Expectations
-->household expectations
-->business expectations |
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Term
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Definition
*fiscal policy
*monetary policy
*foreign national income levels
*the value of the dollar in foreign exchange markets
*expected future inflation - directly related to AD
*rightward - increase in inflation
*leftward - decrease in inflation |
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Term
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Definition
*changing taxes, transfer payments, and government expenditures on goods and services
*taxes (c) - inversely related to AD
*transfer payments (C) - directly related to AD
*government expenditures (G) - directly related to AD |
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Term
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Definition
*changing the quanitiy of money and the interest rate (C,I)
-->change in the quantity of money are inversely realted to the interest rate
-->changes in the quantity of money are directly related to AD |
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Term
| Changes in Foreign National Income (X) |
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Definition
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Term
| Changes in the Value of the Dollar in Foriegn Exchange Markets (X,M) |
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Definition
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Term
| Macroeconomic Equilibrium |
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Definition
*when the quanitity of real GDP demand equals the quanitiy of real GDP supplied at the point of intersection of the AD curve and the AS curve
*short-run in nature
*will determine actual GDP
*actual GDP and the price level are determined at the point of intersection of the AS and AD curves
*since the unemployment rate is inversely related to movements in real GDP movements in the unemployment rate are determined by implication
*rise in GDP = lower unemployment rate
*fall in GDP = higher unemployment rate |
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Term
| Predicting Changes in Actual GDP, Unemployment, and the Price Level |
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Definition
*begin from a position of macroeconomics equilibrium
*shift the curves and predict the effect of this shift on... |
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Term
| Force that Shifts Only the AS Curve |
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Definition
*changes in resources price
*household expectations (C)
-->future incomes
-->future inflation |
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Term
| Forces that Shift the AD Curve: Recall: AD = C+I+G+X-M |
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Definition
*business profit expectations (I)
*fiscal policy (C,G) - Taxes, transfer payments, government expenditures
*monetary policy (C,I)
*value of the dollar in foreign exchange market (X,M)
*foreign nations/imports (X) |
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Term
| Changes in Actual GDP, Unemployment, and the Price Level |
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Definition
*assume work energy market conditions result in decrease in the prices of crude oil and natural gas
*AS curve increase (expansion)
*the unemployment rates decrease
*the price level decreases |
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Term
| Changes in Actual GDP, Unemployment, and the Price Level |
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Definition
*assuems tigher labor markey demand conditions reult in increase in wage rates
*the AS cure shifts leftward
*actual GDP decreases (recession)
*the unemployment increases
*the price level increases
*stag flation |
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Term
| Changes in Actual GDP, Unemployment, and the Price Level |
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Definition
*assume increase in foreign national income increase the demand of US exports
*the AD curve will shift rightward
-->actual GDP increases (espansion)
-->the unemployment rate decreases
-->the price level increases |
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Term
| Changes in Actual GDP, Unemployment, and the Price Level |
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Definition
*assume reduced business profit expectations results in a decrease in investment spending
-->AD curve shifts leftward
-->actual GDP decreses (recession)
-->unemployment increases |
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Term
| Historical Analysis of AS-AD Model: Kennedy Tax Cut, Vietnam War Era, 1963-1969 |
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Definition
*taxes decreased, government purchases increased, and the money supply grew at a 5.4% annual rate
*all of these actions shift the AD curve rightward
*predicted effects of this shift
*increased real GDP
*decreased unemployment
*increased price level |
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Term
| Full-Employment Equilibrium |
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Definition
| *when equilibrium real GDP equals potential GDP |
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Term
| When Full-Employment Equilibrium is Present... |
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Definition
*the AS and AD curves intersect and potential GDP (AD=AD=Potential GDP)
*unemployment is at it's natural state (full employment is present) |
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Term
| Adjustment Toward Full Employment (Self-Correcting Mechanism) |
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Definition
*according to this theory, when actual GDP deviates from potential GDP, automatic forces exist to pull output back to its potential level
*all analysis is based on the assumption that the economy begins from a position of full-employment equilibrium |
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Term
| Introduction to New Terms |
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Definition
*when actual GDP is greater than potential GDP, an infationary gap is present
-->actual GDP > potential GDP
-->unemployment is below its natural state
*when actual GDP is less than potential GDP, a recessionary gap is present
-->actual GDP < potential GDP
-->unemployment is above its natural rate |
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Term
Case 1: A Decrease in Crude Oil Price Shifts the AS Curve Rightward
*Short Run* |
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Definition
*actual GDP increases above its potential level -- inflationary gap
*unemployment decreases below it's natural rate
*the price level decreases |
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Term
Case 1: A Decrease in Crude Oil Price Shifts the AS Curve Rightward
*Long Run* |
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Definition
*rising wages and other resource prices shift the AS curve leftward
*actual GDP declines back toward its potential level - recession
*unemployment rises back to its natural rate
*the price level increases- inflation
*the long run adjustment process described above is sometimes referred to as stage flation - economic decline combined with inflation |
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Term
Case 2: An Increase In Wage Rates Shifts the AS Curve Leftward
*Short Run* |
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Definition
*actual GDP declines below to potential level - recessionary gap
*unemployment rises above AD natural rate
*the price level increases - inflation |
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Term
Case 2: An Increase in Wage Rates Shifts the AS Curve Leftward
*Long Run* |
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Definition
*declines in wage rates and other resource prices shift the AS curve back to the right
*actual GDP increases back to its potential level
*unemployment declines to its natural rate
*the price level decreases |
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Term
Case 3: An Expected Increase in Consumer Incomes Shifts the AD Curve Rightward
*Short Run* |
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Definition
*actual GDP rises above its potential level - inflationary gap
*unemployment declines before its natural rate
*the price level increases |
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Term
Case 3: An Expected Income in Consumer Incomes Shifts the AD Curve Rightward
*Long run* |
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Definition
*rising wage rates shift the AS curuve leftward
*actual GDP declines to its potential level - recession
*unemployment rises to its natural rate
*the price level increases |
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Term
Case 4: A Decrease in Business Profit Expectations Shifts the AD Curve Leftward
*Short Run* |
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Definition
*actual GDP falls below its potential level - recessionary gap
*unemployment rises above its natural rate
*the price level decreases |
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Term
Case 4: A Decrease in Business Profit Expectations Shifts the AD Curve Leftward
*Long run* |
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Definition
*falling wages rates shifts the AS curve rightward
*actual GDP rises back toward its potential level
*unemployment declines toward its natural rate
*the price level decreases |
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Term
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Definition
*according to the self-correcting mechanism, an economy characterized by an inflationary gap or a recessionary gap automatically returns full-employed equilibrium
*this adjustment occurs without any need for corrective government policy action |
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Term
| Using the AD-AS Model to Explain Movements in the US Economy - Stats |
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Definition
*GDP 2007
-->Actual - $13,254.1 Billion
-->Potential - $12,402.7 Billion
*GDP 2009
-->Actual - $12,882.4 Billion
-->Potential - $13,120.0 Billion
*GDP Deflator
-->2007 - 106.2
-->2009 - 109.6 |
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Term
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Definition
*the price of crude oil and money wage rates rose in 2008, both of which precipitated a decrease in AS
*weakness in the housing sector triggered a near collapse US financial markets decreased lending, combined with sharply reduced business profit expectation resulted in a steep reduction in business investment expenditures, which shifted the AD curve leftward |
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