How does increasing the money supply impact interest rates?
Increasing the money supply leads to lower interest rates.
How does increased government spending affect Aggregate Demand?
Increased government spending boosts Aggregate Demand, shifting the AD curve to the right.
How do labor shortages cause inflation?
Labor shortages increase input costs, leading to cost-push inflation.
How does the Fed use open market operations to combat inflation?
The Fed sells government bonds to decrease the money supply, which can cool down inflation.
How does monetary neutrality apply in the long run?
In the long run, changes in the money supply only affect nominal variables like prices, not real variables like output.
How does a decrease in consumer confidence impact demand-pull inflation?
A decrease in consumer confidence decreases consumer spending, reducing the likelihood of demand-pull inflation.
How does a supply shock affect SRAS?
A negative supply shock shifts the SRAS curve to the left, leading to higher prices and lower output.
How does a central bank combat demand-pull inflation?
A central bank can use contractionary monetary policy to reduce aggregate demand and control demand-pull inflation.
Explain how lower interest rates can lead to inflation.
Lower interest rates encourage borrowing and spending, increasing aggregate demand and potentially causing demand-pull inflation.
How does increased productivity affect cost-push inflation?
Increased productivity can offset increased input costs, reducing the likelihood of cost-push inflation.
Define inflation.
A rise in the general price level in an economy.
What is Demand-Pull Inflation?
Inflation caused by increased consumer demand shifting the AD curve to the right.
What is Cost-Push Inflation?
Inflation caused by decreased production due to increased input costs or supply shocks shifting SRAS left.
Define Wage-Price Spiral.
A self-perpetuating cycle where demand-pull and cost-push inflation reinforce each other.
What is Monetary Neutrality?
The idea that changes in the money supply only affect nominal variables, not real variables.
Define Velocity of Money.
How quickly money is spent and re-spent in an economy.
What is the Quantity Theory of Money?
Theory stating that at a constant velocity and GDP, an increase in the money supply leads to a proportional increase in prices.
Define Open Market Operations.
The buying and selling of government bonds by the Federal Reserve to influence the money supply.
What is the Reserve Ratio?
The fraction of a bank's deposits that it is required to keep in reserve.
Define Discount Rate.
The interest rate at which commercial banks can borrow money directly from the Fed.
In a Demand-Pull Inflation graph, what happens to the AD curve?
The AD curve shifts to the right, increasing both price level and real GDP.
In a Cost-Push Inflation graph, what happens to the SRAS curve?
The SRAS curve shifts to the left, increasing price levels but decreasing real GDP.
In a Wage-Price Spiral graph, what happens to the AD and SRAS curves?
The AD curve shifts right, and the SRAS curve shifts left, resulting in higher price levels with little change in real GDP.
What does the intersection of AD and SRAS represent?
The short-run equilibrium price level and output.
How is long-run equilibrium represented on an AD/AS graph?
The intersection of AD, SRAS, and LRAS curves.
What does a rightward shift of the AD curve indicate?
An increase in aggregate demand, potentially leading to demand-pull inflation.
What does a leftward shift of the SRAS curve indicate?
A decrease in short-run aggregate supply, potentially leading to cost-push inflation.
How does increased government spending affect the AD curve?
It shifts the AD curve to the right.
What happens to price level and output when SRAS shifts left?
Price level increases, and output decreases.
How to show the effect of increased government spending on the AD curve?
Shift the AD curve to the right, showing a new short-run equilibrium with a higher price level and a higher output.
