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