macroeconomics

Monetarist Theory

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.

Why is the long run AS vertical?

The long-run aggregate supply curve is perfectly vertical, which reflects economists' belief that the changes in aggregate demand only cause a temporary change in an economy's total output. ... The long-run aggregate supply curve can be shifted, when the factors of production change in quantity.

what is the difference between the long run and short run?

The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run. In the long run the general price level, contractual wages, and expectations adjust fully to the state of the economy.

Phillips Curve

a curve that shows the short-run trade-off between inflation and unemployment

Cost pull inflation

a sustained rise in the price level caused by a leftward shift of the aggregate supply curve

At what level of GDP is LAS vertical?

natural level of real GDP

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

Classical Economic Theory

the predominant paradigm in economic analysis from about 1800 until 1930, based on Say's Law

Why is AD downward sloping?

1. Wealth Effect 2. Interest Rate Effect 3. Foreign Trade Effect

Why may unexpected inflation hurt certain groups?

Lender: Borrower: Worker: Employer:

Why is cost pull inflation difficult for policy makers?

Cost-push inflation occurs when there is an increase in the cost of producing goods and services. This may be caused by higher resource prices, higher energy prices, or higher labor costs. ... In fact, policymakers often prefer a steady, low rate of inflation to no inflation.

Why can expected inflation cause harm in an economy?

Expectations about future inflation directly affect the present inflation rate. Higher expected inflation causes workers to desire higher wages, an increase in expected inflation shifts the short-run Phillips curve

Why is the long-run Phillips curve vertical at the natural rate of employment?

In the long run, expected inflation adjusts to changes in real inflation and the short-run Phillips curve shifts.

Deman-Pull Inflation

Inflation initiated by an increase in aggregate demand

Keynesian economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.

What shifts the Short run Phillips curve?

change in expectations

what shifts the long run phillips curve?

change in the natural rate of unemployment