A rapid and unexpected shift in the AD curve (spending). Show •A positive shock to spending must either increase inflation or the real growth rate. Upgrade to remove ads Only ₩37,125/year
Review all past quizzes 30 questions from Modules 7-10 and 10 questions from Modules 1-6 Terms in this set (77)Anticipated changes are fully expected by economic participants. Unanticipated changes catch people by surprise. The aggregate demand (AD) curve indicates the quantity of goods & services that will be demanded at alternative price levels. An increase in aggregate demand (a shift of the AD curve to the right) indicates that decision makers will purchase a larger quantity of goods and services at each different price level. A decrease in aggregate demand (a shift of the AD curve to the left) indicates that decision makers will purchase a smaller quantity of goods and services at each different price level. The following factors will cause a shift in aggregate demand outward (inward): • an increase (decrease) in real wealth An increase in real wealth, such as would result from a stock market boom, would increase aggregate demand, shifting the entire curve to the right (from AD0 to AD1). In contrast, a reduction in real wealth decreases aggregate demand, shifting AD left (from AD0 to AD2). Moves toward optimism tend to increase AD moves toward pessimism tend to decrease AD. When considering shifts in aggregate supply, it is important to distinguish between the long run and short run. Shifts in LRAS: A long run change in aggregate supply indicates that it will be possible to achieve and sustain a larger rate of output. A shift in the long run aggregate supply curve (LRAS) will cause the short run aggregate supply (SRAS) curve to shift in the same direction. Shifts in LRAS are an alternative way of indicating there has been a shift in the economy's production possibilities curve. Shifts in SRAS: Changes that temporarily alter the productive capability of an economy will shift the SRAS curve, but not the LRAS curve. Factors that increase (decrease) LRAS: • increase (decrease) in the supply of resources Factors that increase (decrease) SRAS: • a decrease (increase) in resource prices — hence, production costs Such factors as an increase in the stock of capital or an improvement in technology will expand an economy's potential output and shift LRAS to the right (note that when the LRAS curve shifts, so too does SRAS). Such factors as a reduction in resource prices or favorable weather would shift SRAS to the right (note that here the LRAS curve will remain constant).
Expansions in the productive capacity of the economy, like those resulting from capital formation or improvements in technology, shifts an economy's LRAS curve to the right. When growth of the economy is steady and predictable, it will be anticipated by decision makers. Anticipated increases in output (LRAS) need not disrupt macroeconomic equilibrium. Consider the impact of capital formation or a technological advancement on the economy. • Both LRAS and SRAS increase (to LRAS2 and SRAS2). In the short-run, output will deviate from full employment capacity as prices in the goods and services market deviate from he price level that people expected. Impact of unanticipated increase in AD: • Initially, the strong demand and higher price level in the goods & services market will temporarily improve profit margins. In response to an unanticipated increase in AD for goods and services (shifting AD from AD1 to AD2), prices rise to P105 and output will increase to Y2, temporarily exceeding full-employment capacity. (unanticipated increase) With time, resource market prices, including labor, rise due to the strong demand. Higher costs reduce SRAS1 to SRAS2. (unanticipated increase) In the long-run, a new equilibrium at a higher price level, P110 , and output consistent with long-run potential will occur. So, the increase in demand only temporarily expands output. So, the increase in demand only temporarily expands output. • Weak demand and lower prices in the goods & services market will reduce profit margins. Many firms will incur losses. The short-run impact of an unanticipated reduction in AD (a shift from AD1 to AD2) will be a decline in output (to Y2), and a lower price level
(P95). (unanticipated decrease) In the long-run, both weak demand and excess supply in the resource market lead to lower resource prices (including labor) resulting in an expansion in SRAS (shifting it from SRAS1 to SRAS2). A supply shock is an unexpected event that temporarily increases or decreases aggregate supply. Impact of Unanticipated Increase in SRAS • SRAS shifts to the right - output temporarily exceeds the economy's long-run potential. Consider an unanticipated, temporary, increase in SRAS, such as may result from a bumper crop from good weather. The increase in aggregate supply (to SRAS2) would lead to a lower price level P95 and an increase in current GDP to Y2. Impact of Unanticipated Decrease in SRAS • SRAS shifts to the left - output falls short of economy's long-run potential
temporarily. Suppose there is an adverse supply shock, perhaps as the result of a crop failure or a sharp increase in the world price of a major resource, such as oil. the higher resource prices shift SRAS to the left in the
product market; in the short-run, price level rises to P110 and output falls to Y2. If the adverse supply shock is temporary, resource prices will eventually fall in the future, shifting SRAS2 back to SRAS1, returning equilibrium to (A) If the adverse supply factor is permanent, the productive potential of the economy will shrink (LRAS shifts left and Y2 becomes YF2) and (B) will become the long-run equilibrium. The basic AD-AS model focuses on how the general level of prices influences the choices of business decision makers. If the price level in the product market changes, this indicates that this price has changed relative to other markets. This structure implicitly assumes that the actual and expected rates of inflation are initially zero. When inflation is present AD-AS model can be recast in a dynamic setting. When the actual and expected rates of inflation are equal: • Inflation will be built into long term contracts. An actual rate of inflation that is less than anticipated is the equivalent of a reduction in the price level. As a result, firms will incur losses and reduce output. An actual rate of inflation that is greater than anticipated is the equivalent of an increase in the price level. Profits will be enhanced and firms will expand output. The AD-AS model indicates that unanticipated changes will disrupt macro equilibrium and result in economic instability.
Recessions occur because prices in the goods and services market are low relative to the costs of production and resource prices. The two causes of recessions are: • unanticipated reductions in AD, and, An unsustainable boom occurs when prices in the goods and services market are high relative to resource prices and other costs. The two causes of booms are: • unanticipated increases in AD, and, The AD-AS model indicates that there are two forces that will help direct an economy back to long-run equilibrium: 1. Changes in real resource
prices Changes in real resource prices: • During a recession, real resource prices will tend to fall because the demand for resources will be weak and the rate of unemployment high. Changes in real interest rates: • During a recession, real interest rates will tend to decline because of the weak demand for investment. The lower interest rates will stimulate AD and help direct the economy back to full employment. 1. Which
of the following will reduce aggregate demand? b 2. An increase in the long-run aggregate supply curve shifts b 3. During recessions, interest rates tend to fall because b 4. In the short run, equilibrium output in the goods and services market may be either above or below the full-employment level, but in the long run, it a. must be less than full-employment output. c 5. Which of the following is most likely to result from an unanticipated increase in short-run aggregate supply due to favorable weather conditions in agricultural areas? a. an increase in the inflation rate c 6.
Which of the following is most likely to accompany an unanticipated reduction in aggregate demand? d 7. Which of the following is most likely to accompany an unanticipated increase in short-run aggregate supply? a 8. In the aggregate demand/aggregate supply model, an economy operating below its long-run potential capacity will experience a. falling real wages and resource prices that will increase SRAS, moving the economy back toward full employment. a 9. Refer to Figure 10-19. Good weather allows agricultural output to double. c 10. Refer to Figure 10-19. There is an increase in the expected rate of inflation. d 11. Refer to Figure 10-19. Consumers and businesses all suddenly decide that the future looks much better than it previously had. a 12. Refer to Figure 10-19. A major technological advance occurs. c 13. Which of the following would not cause a shift in the short-run aggregate supply curve? a. a supply shock b. a decrease in the real interest rate c. a decrease in the expected rate of inflation d. an increase in resource prices b ... d ... a ... a ... a ... a ... a ... d ... d ... c ... b Students also viewedA&P Exam 546 terms cxgpkf6j7m A&P Exam 3124 terms jennahossein24Plus Mental Health Exam 346 terms tpalmer0025 Ast 309L - Search. for Ext. Life EXAM 236 terms ap53275 Sets found in the same folderQuiz 13 Chapter 1615 terms yuliza02 Exam 482 terms yuliza02 exam 181 terms jodea417 Final Exam432 terms yuliza02 Other sets by this creatorbsc 2085 Ch 6 & 920 terms yuliza02 bsc 2085 chapter 520 terms yuliza02 bsc 2085 chapter 388 terms yuliza02 BSC 2085 Chapter 270 terms yuliza02 Verified questions
algebra Assume that an economy is based on two industrial sectors, agriculture (A) and energy $(E)$. The technology matrix $M$ and final demand matrices (in billions of dollars) are $$ D_1=\left[\begin{array}{l}6 \\ 4\end{array}\right] \quad D_2=\left[\begin{array}{l}8 \\ 5\end{array}\right] \quad D_3=\left[\begin{array}{r}12 \\ 9\end{array}\right] $$ Repeat Problem 12 for $D_2$. Verified answer
question Which one of the following is NOT part of the M1 money supply? a. Demand deposits \ b. Currency Savings deposits \ c. Other checkable deposits Verified answer
question Research the strike called by John L. Lewis, the head of the United Mine Workers (UAW), during the height of World War II. More than half a million workers went out on strike and stayed out in defiance of government orders to return to work. As a consequence, steel mills stopped production and the war effort was hampered greatly. Write a paragraph analyzing the ethics of this action from both sides. Verified answer algebra *Evaluate the integral.* $$ \displaystyle\int_{2}^{8}\frac{1}{x+1}\ dx $$ Verified answer |
What effect can real shocks have on the long run aggregate supply curve quizlet?
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