How does increased government spending affect a recessionary gap?
It can help close the gap by increasing aggregate demand and stimulating economic activity.
How do tax cuts affect an inflationary gap?
Tax cuts can worsen an inflationary gap by further increasing aggregate demand.
What is the effect of contractionary fiscal policy on AD?
Contractionary fiscal policy (e.g., reduced government spending or increased taxes) decreases AD.
What is the effect of expansionary fiscal policy on AD?
Expansionary fiscal policy (e.g., increased government spending or reduced taxes) increases AD.
What are the potential drawbacks of using fiscal policy to close a gap?
Potential drawbacks include time lags, crowding out, and the risk of increasing the national debt.
How does monetary policy affect AD?
Monetary policy, such as changing interest rates, influences borrowing costs and investment, thereby affecting AD.
What is the effect of lower interest rates on AD?
Lower interest rates encourage borrowing and investment, shifting the AD curve to the right.
How might the government intervene to correct an inflationary gap?
The government could decrease government spending or increase taxes.
What is the impact of increased regulations on SRAS?
Increased regulations can increase production costs, shifting the SRAS curve to the left.
How does self-correction address a recessionary gap?
Self-correction relies on wages and prices adjusting downwards, shifting SRAS to the right and restoring equilibrium at full employment.
Define Aggregate Demand (AD).
The total demand for goods and services in an economy at a given price level.
Define Short-Run Aggregate Supply (SRAS).
The total quantity of goods and services that firms are willing and able to supply at different price levels in the short run.
Define Long-Run Aggregate Supply (LRAS).
The level of output an economy can produce when using all its resources efficiently; it's vertical at the potential output level.
What is short-run aggregate equilibrium?
The point where the quantity of aggregate demand equals the quantity of aggregate supply (AD = SRAS).
What is long-run aggregate equilibrium?
The point where AD, SRAS, and LRAS all intersect, representing full employment and potential output.
Define recessionary gap.
A situation where the short-run equilibrium output is below the full-employment level.
Define inflationary gap.
A situation where the short-run equilibrium output is above the full-employment level.
What is potential output?
The level of output an economy can achieve when all resources are fully employed.
Define full employment.
The level of employment when the economy is producing at its potential output.
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is at full employment (typically 4-6%).
How does increased consumer confidence affect the AD curve?
Increased consumer confidence leads to higher spending, shifting the AD curve to the right.
How does a decrease in input costs affect the SRAS curve?
A decrease in input costs increases profitability for firms, shifting the SRAS curve to the right.
What is the effect of technological advancements on the LRAS curve?
Technological advancements increase potential output, shifting the LRAS curve to the right.
How does high unemployment relate to a recessionary gap?
High unemployment is a key characteristic of a recessionary gap, indicating that the economy is producing below its potential.
How does rapid inflation relate to an inflationary gap?
Rapid inflation is a potential consequence of an inflationary gap, as demand exceeds the economy's capacity to produce.
What happens to the price level during a recessionary gap?
The price level tends to decrease or remain stable during a recessionary gap due to weak demand.
What happens to real GDP during an inflationary gap?
Real GDP is above potential output during an inflationary gap.
How does government spending affect AD?
Increased government spending directly increases aggregate demand, shifting the AD curve to the right.
How do taxes affect AD?
Decreased taxes increase disposable income, leading to increased consumer spending and a rightward shift in the AD curve.
How does an economy self-correct from a recessionary gap?
Wages and prices eventually fall, shifting the SRAS curve to the right until full employment is restored.
