Chapter 22: AD and AS Analysis

Question 1

Four components of AD

Answer 1

1. consumption expenditure
2. planned investment spending
3. government purchases
4. net exports

Question 2

AD curve

Answer 2

Y_AD = C + I + G + NX

Question 3

demand shocks

Answer 3

things that can shift the AD curve

Question 4

7 demand shocks

Answer 4

1. autonomous monetary policy, shift left
2. government purchases, shift right
3. taxes, shift left
4. autonomous net exports, shift right
5. autonomous investment, shift, right
6. financial frictions, shift left

Question 5

AS curve

Answer 5

the relationship between the quantity of output supplied and the inflation rate

Question 6

natural rate of unemployment

Answer 6

the rate at which the economy gravitates in the LR

Question 7

natural rate of output/potential output

Answer 7

the level of aggregate output produced at the natural rate of unemployment

Question 8

SR AS curve shifts

Answer 8

1. expectation of inflation
2. the output gap
3. inflation

Question 9

output gap

Answer 9

percentage difference between aggregate output and potential output

Question 10

output and inflation

Answer 10

When Y > Y_P (Y-Y_P > 0), inflation rises

Question 11

supply shocks

Answer 11

when there are shocks to the supply of goods/services in an economy that translates into inflation shocks

Question 12

inflation shocks

Answer 12

shifts in inflation that are independent of the amount of slack in the economy or expected inflation

Question 13

cost-push shocks

Answer 13

when workers push for wages higher than productivity gains which drives up costs and inflation

Question 14

SR AS curve equation

Answer 14

inflation = expected inflation + sensitivity of inflation * (Y - Y_P) + inflation shock

Question 15

shifts in LR AS Curve

Answer 15

1. total amount of capital in economy, shift right
2. total amount of labor supplied in economy, shift right
3. available tech that puts labor and capital together to produce goods/services, shift right
   i.e. people, factories, and technology

Question 16

general equilibrium

Answer 16

the point where all markets are in equilibrium and the quantity of aggregate output demanded equals the quantity of aggregate output supplied

Question 17

self correcting mechanism

Answer 17

regardless of where output is initially, it returns eventually to potential output

Question 18

Demand shocks in SR and LR

Answer 18

SR: rightward shift, rise inflation and output
LR: only rise in inflation

Question 19

positive supply shock

Answer 19

increase in supply

Question 20

stagflation

Answer 20

rising inflation but falling level of aggregate output

Question 21

Temporary Supply shocks in SR and LR

Answer 21

SR: temporary positive supply shock, shift down, inflation falls and output rises
LR: output and inflation are unchange

Question 22

real business cycle theory

Answer 22

aggregate economic fluctuations are shocks in taste and tech and are driving forces behind SR fluctuations

Question 23

Permanent supply shock in SR and LR

Answer 23

SR: permanent negative supply shock, decline in output and rise in inflation
LR: permanent decline in output and permanent rise in inflation

Question 24

AD and AS Conclusions

Answer 24

1. economy has self correcting mechanism that returns it to potential output and natural rate of unemployment
2. shift in AD curve affects output in SR
3. temp. supply shock affects output and inflation in SR
4. permanent supply shock affects output and inflation in SR and LR

Question 25

LRAS Curve

Answer 25

denotes the amount of output that can be produced by an economy in the LR

Question 26

Factors of potential output

Answer 26

1. amount of capital in the economy 2. total amount of labor supplied at full employment 3. available technology that puts labor and capital together to produce goods and services

Question 27

LRAS vs SRAS

Answer 27

how long it takes to renegotiate wages - as wages get renegotiated more often, the closer SRAS curve becomes the LRAS curve

Question 28

what are factors of potential output in the long run?

Answer 28

- number of workers - stocks - technology (price level not included)

Question 29

positive output gap (Y - Yp > 0)

Answer 29

- little slack in economy and labor gets tight - workers demand for higher wages - firms increase prices - higher inflation

Question 30

negative output gap (Y - Yp < 0)

Answer 30

- lots of slack in economy and workers accept smaller increases in wages - firms lower prices to sell goods - lower inflation

Question 31

influences in today's inflation

Answer 31

1. rising $ which decreases price of imported goods 2. synchronous global economic slow down 3. fall in oil prices 4. rising commodity prices 5. rising unit labor costs - SRAS shifts up

Question 32

shifts in AS from expected inflation

Answer 32

- rise in expected inflation, AS shifts left - fall in expected inflation, AS shifts right

Question 33

shifts in AS from inflation shock

Answer 33

- favorable supply shock, AS shifts right - unfavorable supply shock, AS shifts left

Question 34

shifts in persistent output gap

Answer 34

- (Y - Yp) > 0, AS shifts left - (Y - Yp) < 0, AS shifts right