Aggregate supply and demand in equilibrium
Positive shocks or changes to aggregate supply include
-An unexpected increase in productivity -An abrupt decrease in oil prices
Depression
A long-lasting and severe recession
Negative shocks or changes to aggregate supply include:
A natural disaster; An abrupt increase in oil prices
Expansion:
A phase of the business cycle characterized by increasing real GDP, income, and employment.
A positive supply shock causes ________ to shift to the ________.
AS; right
Short-run equilibrium occurs when SRAS and ____ intersect.
Aggregate demand
What might lead to expansion in the business cycle?
An increase in SRAS
As nominal wages and the costs of other resources rise during an expansion:
The aggregate supply curve shifts to the left, real output falls and the price level rises further.
Once an expansion occurs, as nominal wages and the costs of other resources rise, eventually:
The aggregate supply curve shifts to the left, the price level rises, and real GDP returns to the full employment level
Suppose there is an economy-wide decrease in business taxes. What can we expect to see in a business cycle model?
The business cycle enter an expansion
Trough:
The lowest point of economic activity in the business cycle, where real GDP reaches a minimum. It marks the end of a recession
Peak
The point of the business cycle at which an expansion ends and a recession begins.
T/F The short-run equilibrium level of real GDP is not necessarily the full-employment level of output that is consistent with the long run.
True
The equilibrium price level and real GDP are determined by the intersection of the:
aggregate demand and short run aggregate supply curves.
Negative shocks or changes to aggregate demand include
an increase in taxes; a decrease in consumer confidence
Suppose there is a negative demand shock. In the short run, the economy moves to a new equilibrium where real GDP is:
below the full-employment level, and employment is higher than the natural rate.
A decrease in consumer confidence causes aggregate _________ to fall
demand
When aggregate ________ decreases, there is lower inflation and higher unemployment.
demand
Inflation that results from an increase in aggregate demand is called:
demand-pull inflation
Unemployment is _______ than the natural rate
higher
Both recession and expansion can cause __________, or a general increase in the level of prices.
inflation
Eventually, the economy moves to a new _________-run equilibrium at a lower price level and full-employment output.
long
______-run equilibrium occurs where SRAS, AD, and LRAS intersect
long
In the long run, the equilibrium price level is determined by the intersection of the _______-run aggregate supply curve and the aggregate ___________ curve
long; demand
If the economy is producing above equilibrium, unemployment is very
low, wages will start to rise, which puts upward pressure on prices.
A _________ shock causes aggregate demand or supply to fall at every price level.
negative
A ______ is the highest point in the business cycle.
peak
Recession
period of reduced economic activity
Aggregate demand and Aggregate supply are connected to the business cycle through ________ _______.
real GDP
In this _________ phase of the business cycle, real GDP declines. The economy will reach a trough, or the lowest point in the business cycle.
recession
Inflation can be caused by:
recession (a decrease in AS can cause inflation); expansions (An increase in AD can cause inflation)
Over time, as nominal wages and the costs of other resources fall, the economy begins to recover. Aggregate supply shifts tot he ________ so that output expands and the price level falls further.
right
Suppose that and increase in personal income taxes causes aggregate demand to decrease so that the economy moves to a new ________-run equilibrium.
short
Business cycle:
short-term fluctuation experienced in the economy due to changes in levels of economic activity
before the 1970's, rising inflation and unemployment, called _______, was unknown in the U.S.
stagflation
A positive shock causes aggregate _________ to rise at every price level.
supply
Cost-push inflation occurs as an increase in resource costs shifts aggregate ________ tot he left.
supply
The short-run equilibrium occurs where:
the AD and AS curves intersect
As nominal wages and the costs of other resources fall during a recession:
the aggregate supply curve shifts to the right, real output grows, and the price level falls further
The aggregate demand and supply model can be used
to describe changes in an economy's price level and real GDP in the short and the long run
The term stagflation was coined in the 1970's, during a period of high _________ and high inflation in the U.S.
unemployment
The long-run aggregate supply curve is a _________ line originating at the full-employment level of real GDP.
vertical
The long-run aggregate supply curve is:
vertical