Macroeconomics Test 2

The amount of real GDP all sectors of the economy want to purchase at a given rate of inflation.

• Real Balance Effect
• Interest Rate Effect
• Foreign Trade effect

• The lower the inflation/prices, the more people buy (raising GDP)
• The higher the inflation rate/prices, the less people buy (raising GDP)
• The Curve never moves, it just goes up and down the curve

• Higher interest rates, borrowmoney costs more, so sending goes down (lowering GDP)
• Lower interest rates, borrowing money cost less, so people spend more (raising GDP)
• The AD cuvre never moves, it just goes up and down the curve

• When American goods are more expensive than foreigh goods, there will be more imports than exports, so net exports will go down (lowering GDP)
• When American goods are less expensive than foreigh goods, there will be more exports than imports, so net exports will go up (raising GDP)
• The AD cuvre never moves, it just goes up and down the curve

• Consumption
• Investment
• Net Exports
• Government
• (Basically all the components of GDP)

• The curve will move left or right depending on more or less of:
• Peoples Wealth
• Fututre Expectiations
• Intereset Rates
• Taxes

• The curve will move left or right depending on more or less of:
• Future Expectations
• Interest Rates
• Taxes

• The curve will move left or right depending on more or less of:
• Foreign Income
• Exchange Rates

• When the governement spends more, they raise GDP
• When they spend less, they lower GDP

Tells you what level of Real GDP that firms want to produce given what the rate of inflation is

• Profit Effect
• Cost Effect

• As individual prices rise, so does the cost of production. Making profits go down, so companies will produce less (Lowering GDP)
• As individual prices go down, so do the costs of production. Making profits go up, so companies will produce more (Raising GDP)
• The SRAS cuvre never moves, it just goes up and down the curve

As more is being produced the price will go up, but the SRAS curve doesn't move

• Changes in the Cost of Production
• Supply Shock

• The curve will move left or right depending on more or less of:
• Wages
• Input Prices
• Productivity

If there is bad weather, disasters, or if oil prices go up, GDP will go down and the SRAS curve will move left

• If wages go up, cost of production goes up, so profits go down
• If input prices go up, cost of production goes up, so profits go down
• If productivity goes up, cost of production will go down, so profits will go up

Where the AD and SRAS curve intersect

More GDP is being produded than people or consuming or demanding

People are demanding more GDP than is being produced

• GDP goes down (Bad)
• Unemployment goes up (Bad)
• Inflation goes down (Good)

• GDP goes up (Good)
• Unemplyment goes down (Good)
• Inflation goes up (Bad)

• GDP goes down (Bad)
• Unemployement goes up (Bad)
• Inflation goes up (Bad)

• GDP goes up (Good)
• Unemployment goes down (Good)
• Inflation goes down (Good)

• The LRAS curve does not move in the short run
• The LRAS curve moves right in the long run due to productivity continuing to rise

• Says's Law
• Flexible Wages and Prices
• Economy Exists in one of 3 states
• Labor Market changes move you between the 3 states
• Economy Self Reculates
• Government Involvement can increase real GDP in the short run, but not in the long run

Supply creates it's own demand

• People may save instead of spend
• This is thought to be resolved by lowering interest rates causing investment spending to rise

Belief that any disequality is only temperary and is quickly resolved by prices adjusting up or down

• Long Run equilibrium
• Recessionary Gap
• Inflationary Gap

• When short run equilibium is along the LRAS
• AD = SRAS = LRAS
• At Natural Rate of Unemployment
• At NAtural Rate of Real GDP

• Short run equilibrium is left of the LRAS
• Excess Labor
• Unemployment is above natural rate

• Short run equilibrium is right of the LRAS
• Shortage of Labor
• Unemployment is below the natural rate

• In a Recessionary Gap there is a surplus in labor so wages will be lower
• In a Inflationary Gap there is a shortage of labor so wages will be higner

• In a recessionary gap people will accept lower wages, giving companies more profit, so they produce more. This moves the SRAS curve right until it reaches long run equilibrium.
• In an inflationary gap people will have higher wages, making profits less, so companies produce less. This moves the SRAS curve left until it reaches long run equilibrium.

• Classical economists believe that governement can increase GDP in the short run, but not in the long run.
• Classical economists believe that government involvement only raises the inflation rate.

• Does not believe in Say's Law - the leakage is not solved by income in investment.
• Prices and Wages are inflexible downward

• (Marginal Propensity to Consumer)
• The amount by which consumption spending changes when disposable income changes.

• Change in Consumption over Change in Disposable Income
• (Change in C over Change in YD)

• (Disposable Income)
• Income - Taxes