Show:
Aggregate Demand
Aggregate Demand
Aggregate Supply
Aggregate Supply
Labor Market
100

What is the ”solution“ to the crowding-out effect called?

FED Accommodation

100

If the FED is decreasing the money supply, what type of policy is this?

Contractionary Monetary Policy

100

Draw the Keynesian AS curve.

Starts out flat, and becomes vertical in long run, PL and Y are axes

100
When is the Keynesian AS Curve flat?

Recession, Depression, Trough, etc.

100

What is an example of structural unemployment?

Tech/AI replacing a job, job outsourcing

200

Draw the AD curve.

Downward sloping - PL and Y are axes 

200

Under what type of policy does the crowding-out effect happen?

Expansionary Fiscal Policy - ONLY GOV SPENDING

200

What shifts the AS curve?

  • Weather, (tightening/lifting) regulations, input costs (labor)…
200

Who is responsible for hyperinflation/sustained inflation?

FED - Purely Monetary Phenomenon

200

What is the natural rate of unemployment?

Frictional + Structural

300

What type of policy most affects the goods market?

Fiscal Policy - Y = C + I + G
300

When is there an equilibrium interest rate?

MD = MS

300

When is the classical AS curve flat?

Never

300

Why is the classical AS curve different from the Keynesian AS curve?

Classical economists believed the economy is self-correcting

Great Depression demonstrated the necessity of policy intervention

300

How has the accuracy of the Phillips curve changed over time

Now not realistic after 60s/70s - not always a clear link between PL, Y, and unemployment

400

What shifts the AD curve?

Expansionary Policy shifts curve to right, Contractionary Policy shifts curve to left

400

What are the 3 reasons why the AD curve slopes downward?

  1. Investment Link: PL inc. -> Md inc. -> Inflationary Period -> r inc. -> I dec.
  2. Consumption Link: PL inc. -> Md inc. -> Infl. Period -> r inc. -> C dec.
  3. Real Wealth Effect: As PL inc. -> Purchasing Power (Wealth) dec.
400

What does cost shock/supply shock refer to?

  • Change in costs that shifts the short-run AS curve (Natural Disasters, War, etc.)
400

What are the 2 reasons for the shape of the AS curve?

  1. Capacity - When the economy is operating on flat portion of AS curve -> economy is not at full capacity (recessionary side of business cycle), vertical portion - economy is at full capacity (peak of business cycle)
  2. Wages lag behind price level (PL) 
400

What impact does anticipated inflation have on the Phillips Curve?

Shift to the right

500

Outline how the money market and the goods market affect each other

AE - Planned Aggregate Expenditure (AE = Y)

AE = C + I + G

(MD = MS = Equilibrium interest rate)

r inc. -> I dec. -> AE dec. -> Y dec.

r dec. -> I inc. -> AE inc. -> Y inc.

(Money market affecting goods market)


Y -> Income

Y inc. -> Md inc. -> r inc. (Inflationary Period)

Y dec. -> Md dec. -> r dec. (Recessionary Period)

(Goods market -> affecting money market)

500

When is there a movement on the AD curve?

Never

500

When and why should policy be done on the AS curve? (Draw out a model)

Expansionary Policy:

  • Should only be used on flat portion of AS curve (operating below full capacity/recession)

During Recession: Large output Increase possible without large PL inc.

During Peak: Small output while having large PL inc.

500

What does demand-pull inflation refer to?

  • Inflation that is initiated by an increase in AD (Expansionary Policy during peak/vertical portion)
500

Name and explain at least 3 reasons for sticky wages.

Why do Sticky Wages Exist:

Social Contracts:

  • Social or Implicit Contracts - Unspoken agreement that firms won’t cut wages
  • Relative-Wage Explanation of Unemployment - If workers are concerned about wages relative to the other workers in firms and industries, they may be unwilling to accept a wage cut unless they know other workers are receiving similar cuts


Explicit Contracts:

  • Explicit Contracts - Employment contracts that stipulate wages usually 1-3 years
  • Cost-of-Living-Adjustments (COLAs) - Contract provisions that tie wages to changes in cost of living. The greater the inflation rate, the more wages are raised (Social Security/Medicare)
  • Efficiency Wage Theory - Explanation for unemployment that holds that the productivity of workers increases with the wage rate. If this is so, firms may have an incentive to pay wages above the market-clearing rate. 

     (Lawyers working many hours bc paying above market-clearing price)

  • You won’t “shirk your work”