Aggregate Demand and Aggregate Supply

These flashcards cover key concepts related to aggregate demand, aggregate supply, and the business cycle as outlined in the lecture notes.

What are the two phases of the business cycle?

Expansions (rising GDP) and recessions (falling GDP).

How is a recession defined in terms of real GDP?

A recession is defined as two consecutive quarters of negative real GDP growth.

What effect does a business cycle expansion have on inflation?

It typically leads to high inflation due to increased demand for goods and services.

What is the relationship between the business cycle and unemployment?

Unemployment rates tend to increase during recessions as firms reduce production and lay off workers.

What causes shifts in the aggregate demand curve?

Changes in consumption, investment, government purchases, and net exports.

Why does the aggregate demand curve slope downward?

A fall in the price level increases the quantity of real GDP demanded due to the wealth effect, interest-rate effect, and real exchange rate effect.

What determines the long-run aggregate supply?

The available resources, technology, and the natural rate of unemployment, which are unaffected by the price level.

What is stagflation?

A combination of rising inflation and stagnating output, often resulting from a supply shock.

What is the impact of an increase in the price level on the short-run aggregate supply curve?

The short-run aggregate supply curve is upward sloping; firms are willing to supply more at higher prices.

What happens to the short-run aggregate supply curve when expected future prices increase?

It shifts to the left as wages and prices are adjusted upwards in anticipation.