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Flashcards in AS/AD Deck (17)
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aggregate demand

  • sum of planned consumption in an economy in a given period
  • looks the same as normal demand curve


aggregate supply

sum of planned production in an economy in a given period


Keynesian vs. Neoclassical aggregate supply curves

a) Keynsian

b) Neo-classical


What does YFE​ refer to?

full employment level of output of a nation


Full employment level of output

  • level of output of goods and services achieved when a nation is producing at or near its potential by employing all available land, labor and capital
  • on its PPC
  • low unemployment rate
  • stable price level


How do these shift AD?

  1. interest rates increase
  2. income tax rates increase
  3. government expenditure increase
  4. consumer confidence improves
  5. business confidence improves
  6. expectation of future inflation
  7. expectation of future increased income/wealth
  8. expectation of future increased revenue/profit
  9. increase in foreign RGDP
  10. appreciation in value of domestic currency
  11. increase in foreign inflation rate

  1. left
  2. left
  3. right
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  9. left
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  11. right


How do these shift SR/LR AS?

  1. increase spending on education/training
  2. increase spending on capital spending
  3. increase spending on infrastructure
  4. decrease spending on research/development
  5. increase taxes on business earnings
  6. strengthen competition/anti-monopoly
  7. privatise state-owned assets
  8. strengthen union power
  9. decrease minimum wage
  10. increase transfer payments
  11. decrease training schemes
  12. increase marginal tax rate
  13. decrease capital gains tax
  14. weaken environment laws
  15. strengthen health/safety laws
  16. increase productivity
  17. increase wages
  18. increase cost of labor
  19. decrease cost of raw materials
  20. increase capital stock
  21. decrease cost of imported factors of production
  22. improvements in technology
  23. increase in budget deficit (crowding out)

  1. right (LR/SR)
  2. right (LR/SR)
  3. right (LR/SR)
  4. left (LR/SR)
  5. left (SR)
  6. right (SR)
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  8. left (SR)
  9. right (SR)
  10. left (SR)
  11. left (LR/SR)
  12. left (SR)
  13. right (SR)
  14. right (SR)
  15. left (SR)
  16. right (LR/SR)
  17. left (SR)
  18. left (SR)
  19. right (SR)
  20. right (LR/SR)
  21. right (SR)
  22. right (LR/SR)
  23. left (SR)



exogenous factors

out of control of policy makers



network of communication, transport, water, education, health, etc.


marginal tax rate

tax on money made from buying shares


capital gains tax

tax on profit from the sale of property or investment


What is the heuristic when determining short-run vs. short-run and long-run aggregate supply shifts?

  • SR: costs of factors of production
  • LR/SR: changes in quality or quantity of factors of production 


marginal efficiency of capital graph

  • only buy capital when money it makes > putting money in the bank
  • changes in interest rates influence investment


loanable funds graph

  • when government borrowing increases, crowds out private sector borrowing
  • Keynes argues government borrowing only crowds out when AS is in vertical portion


Keynesian aggregate supply

Keynesian range:

  • recession - economy not fixing itself
  • growth without inflation because no many unused factors of production

Intermediate range:

  • inflation begins
  • bottleneck: constraints on available, unused factors of production

classical range:

  • inflation without growth
  • demand-pull inflation - as AD shifts pulls up inflation
  • businesses stealing factors of production from each other 
  • on PPC




Supply-side aggregate supply

  • can briefly go beyond LRAS (not limit) but pulled back
  • if AD grows, SRAS decreases as cost of production increases
  • demand-pull inflation
  • government intervention useless because pulled back
  • believe economy always close to full capacity


inflationary and deflationary gap

  • graph shows deflationary gap (inflationary is on other side)
  • 'close' inflationary gaps
  • 'fill' deflationary gaps
  • inflationary gap: amount by which SRAS exceeds LRAS
  • deflationary gap: amount by which LRAS exceeds SRAS