AP MACRO Section 4

The correct formula for output gap is

(Aggregate output- potential output) Potential output X100

This can cause a shift in the short run aggregate supply curve

A change in commodity prices

A decrease in aggregate demand will generate ____ in real GDP and ___ in the price level in the short run

A decrease, a decrease

What will cause SRAS to increase

A large decrease in the price of oil

Yp is represents

A potential output for this economy

A decrease in investment is shown by

A shift left in AD

The intersection of AD with SRAS indicates

A short run equilibrium

Suppose the economy is operating in long run equilibrium. If a positive demand shock hits the economy, we would expect

A short run increase in real GDP and price level, and a long run decrease in real GDP and increase in price level

Wages and profits affect

AD CURVE

Exports increase

AD INCREASES

Expectations can change

AD curve

If the value of a household wealth increases what will happen

AD curve will shift right

When consumers and firms become more optimistic what will happen in the short run

AD curve will shift right

A recessionary gap occurs if

Actual real GDP is less than potential output

Monetary and fiscal policies cause

Ad curve to shift

A negative supply shock often results in

An increase in the aggregate price level and a decrease in aggregate output

Stagflation may result from

An increase in the price of imported oil

An increase in aggregate demand will generate ___ in real GDP and ____ in the price level in the short run

An increase, an increase

An increase in investment leads to _____ in the price level and _____ in real GDP in the short run

An increase, an increase

If the SRAS curve intersects the aggregate demand curve to the right of LRAS the result will be

An inflationary gap

Suppose the economy is in long run equilibrium and aggregate demand increases. As the economy moves to shirt run equilibrium there is

An inflationary gap with low unemployment

Producing a short run level of aggregate output that exceeds the economy's potential output results in

An upward adjustment in nominal wages

SRAS shifts when

Changes in price level or production

Changes in SRAS can be caused by changes in

Commodity prices

Exchange rates make AD

Decrease

A recessionary gap will be eliminated because there is ____ pressure on wages causing the ____

Downward, shirt run aggregate supply curve to shift rightward

In the long run, nominal wages are

Flexible because contracts and informal agreements are renegotiated in the long run

If an economy is in Short run equilibrium such that the level of output is greater than potential output this means

In the long run nominal wages will rise

If an economy is currently operating at an output level below its potential real GDP if government wishes to use a fiscal policy to bring the economy back to potential GDP it will

Increase government spending

A rise in labor productivity is most likely to result in

Increase in SRAS

If the economy is operating below potential output the appropriate monetary policy is to

Increase the money supply and decrease interest rates

In the long run (as the economy self corrects) an increase in aggregate demand will cause the price level to ___ and potential output to____

Increase, remain stable

Using monetary policy to address a recessionary gap created by a supply shock involves _____ to _____

Increasing the amount of money in circulation, lower the unemployment rate

Stagflation is a combination of

Increasing unemployment and increasing inflation

When the economy is producing above the potential it has an

Inflationary gap

When y1 is greater than potential output it is called an

Inflationary gap

If price level increases

LRAS curve will shift right

As the size of the labor force increases over time which of the following will take place

LRAS will shift right

An inflationary gap

Means the economy is operating beyond its potential output

A natural disaster that destroys party of a country's infrastructure is a type of ____ and therefore shifts the ____ to the _____

Negative supply shock, SRAS curve, left

An improvement in the business outlook of firms is a type of ___ and therefore shifts the ____ to the ____

Positive demand shock, aggregate demand curve,right

The level of output in the long run is known as

Potential output

The level of output that the economy would produce if all prices, including nominal wages were fully flexible is called

Potential output

Unemployment is high when

Potential output is greater than actual output

When the economy is producing output below potential it has a

Recessionary gap

If commodity prices increase what will take place

SRAS curve will shift left

A general decrease in wages will result in

SRAS shifting to the right

A negative demand shock (all things equal)

Shifts AD to the left and results in lower aggregate price levels and lower real GDP in the short run

If nominal wages fall, then SRA

Supply shifts to the right

Inflationary and recessionary gaps are closed by self correcting adjustments that shift

The SRAS curve

Suppose the political instability in the Middle East temporarily interrupts the supply of oil to the United States. What is most likely to occur

The SRAS curve shifts left, output decreases, and price increases

The point at which the LRAS curve touches the x axis is known as

The economy's potential output

A nations potential output is

The level of real GDP that the economy would produce if all prices including nominal wages were fully flexible

If the short run equilibrium is ___ of the economy's potential output then there is a _____ and the aggregate price level is expected to ___

To the left, recessionary gap, fall

The SRAS curve is

Upward sloping

The short run aggregate supply curve is _____ and the long run aggregate supply curve is _____

Upward sloping, vertical

The short run aggregate supply curve slopes upward because of

Wage and price stickiness

The short run aggregate supply curve is positively sloped because

Wages are sticky or don't readily adjust to changes in economic conditions in the short run

Increase government spending and decrease taxes when recessionary

decrease government spending and increase taxes when inflationary