All flashcards
Flashcard 1: What happens to unemployment in the long run after an inflationary gap?
Answer: Unemployment returns to natural rate. Higher costs reduce employment back to the natural rate.
Flashcard 2: What shifts the aggregate supply curve in the long-run self-adjustment process?
Answer: Changes in resource prices and expectations. These factors shift SRAS to eliminate gaps between actual and potential GDP.
Flashcard 3: What is the effect of a decrease in aggregate demand on long-run equilibrium?
Answer: Price level decreases; output unchanged. Lower prices restore equilibrium without affecting long-run output.
Flashcard 4: Identify the impact of technological advancements on long-run self-adjustment.
Answer: Shift long-run aggregate supply rightward. Technology increases productive capacity, expanding potential GDP.
Flashcard 5: How does long-run self-adjustment address overemployment?
Answer: Increases in wages reduce labor demand. Higher wages from tight labor market reduce employment to natural rate.
Flashcard 6: What happens to the price level in the long run if aggregate demand increases?
Answer: Price level rises. Higher demand creates inflation but output returns to potential GDP.
Flashcard 7: If aggregate demand decreases, what long-run adjustment occurs?
Answer: Prices fall, increasing aggregate supply. Lower production costs shift SRAS right to restore equilibrium output.
Flashcard 8: In long-run self-adjustment, how does the economy respond to inflation?
Answer: Aggregate supply decreases. Higher wages increase costs, shifting aggregate supply left to reduce output.
Flashcard 9: What is the classical view on government intervention in long-run adjustments?
Answer: It is unnecessary for achieving full employment. Classical theory assumes markets self-correct efficiently through price flexibility.
Flashcard 10: How does long-run self-adjustment affect inflationary expectations?
Answer: Adjusts expectations to align with actual inflation. Adjustment process corrects expectation errors over time.
Flashcard 11: How do expectations of future prices affect long-run self-adjustment?
Answer: They influence wage and price adjustments. Expected price changes affect wage negotiations and production costs.
Flashcard 12: What is the long-run self-adjustment mechanism in economics?
Answer: A process where the economy returns to full employment output. Happens when wages and prices adjust to bring output back to potential GDP.
Flashcard 13: Identify the primary factor that adjusts in the long run to reach equilibrium.
Answer: Price level. Changes in price level allow the economy to move toward long-run equilibrium.
Flashcard 14: What happens to wages in the long run if the economy is in a recession?
Answer: Wages decrease. Lower wages reduce costs, shifting aggregate supply right toward full employment.
Flashcard 15: What role do flexible prices play in long-run self-adjustment?
Answer: They help restore full employment equilibrium. Prices adjust to eliminate output gaps and restore potential GDP.
Flashcard 16: Which curve shifts due to long-run self-adjustment in response to a recession?
Answer: Aggregate supply curve shifts right. Lower wages reduce production costs, increasing short-run aggregate supply.
Flashcard 17: State the result of the long-run self-adjustment on output.
Answer: Output returns to potential GDP. Self-adjustment eliminates output gaps by returning to natural level of output.
Flashcard 18: What is the relationship between short-run and long-run aggregate supply?
Answer: Long-run is vertical; short-run is upward sloping. LRAS is vertical at potential GDP; SRAS slopes upward due to sticky prices.
Flashcard 19: How does the self-correction mechanism adjust the economy in the long run?
Answer: By adjusting wages and prices. Price flexibility allows economy to return to full employment equilibrium.
Flashcard 20: How does long-run self-adjustment impact potential GDP?
Answer: Potential GDP remains unchanged. Self-adjustment only affects actual GDP, not productive capacity.
Flashcard 21: What happens to the economy if wages are perfectly flexible?
Answer: Quick adjustment to full employment. No wage rigidity allows immediate return to natural employment rate.
Flashcard 22: How does long-run self-adjustment affect the aggregate demand curve?
Answer: It does not affect aggregate demand directly. Self-adjustment works through supply shifts, not demand changes.
Flashcard 23: What is the consequence of price stickiness on long-run self-adjustment?
Answer: Delays return to full employment output. Rigid prices prevent quick adjustment to eliminate output gaps.
Flashcard 24: What is the role of sticky wages in delaying long-run self-adjustment?
Answer: They slow down wage adjustments to equilibrium. Rigid wages prevent quick price adjustments needed for equilibrium.
Flashcard 25: Identify a factor that can shift the long-run aggregate supply curve.
Answer: Changes in technology. Technology permanently increases economy's productive capacity.
Flashcard 26: What is the expected long-run adjustment if an economy is overheated?
Answer: Aggregate supply shifts left. High demand creates inflation, raising costs and reducing supply.
Flashcard 27: What is the role of labor market flexibility in long-run self-adjustment?
Answer: Facilitates wage adjustments to full employment. Flexible wages enable quick adjustment to employment equilibrium.
Flashcard 28: What is the long-run effect of a positive supply shock?
Answer: Lower prices with potential GDP unchanged. Increased supply capacity reduces prices while maintaining full employment.
Flashcard 29: What is the effect of long-run self-adjustment on unemployment?
Answer: Unemployment returns to the natural rate. Wage adjustments restore equilibrium employment at the natural rate.
Flashcard 30: What is the long-run effect of a supply-side policy on the economy?
Answer: Increases potential output. Expands productive capacity by improving technology or resources.