Aggregate Demand and Aggregate Supply

These flashcards cover key terms and concepts related to Aggregate Demand and Aggregate Supply, their effects, and economic theories.

Aggregate Demand (AD)

Total spending in the economy, represented as C + Ip + G + NX.

Aggregate Supply (AS)

The total output producers are willing and able to supply at a given overall price level.

Real Wealth Effect

When the price level increases, real wealth decreases, leading to a decrease in consumption.

Net Export Effect

An increase in the domestic price level leads to decreased exports and increased imports, decreasing net exports.

Interest Rate Effect

When the price level increases, it leads to higher demand for money and thus higher interest rates, reducing consumption and investment.

Long-Run Aggregate Supply (LRAS)

A vertical curve that indicates the economy's potential output when all resources are fully employed.

Short-Run Aggregate Supply (SRAS)

An upward-sloping curve that indicates the relationship between the price level and quantity of output supplied in the short run.

Keynesian Cross Model

A model that illustrates how total output and spending relate to each other in the economy.

CPI (Consumer Price Index)

A measure that examines the weighted average of prices of a basket of consumer goods and services, used to assess inflation.

Shifters of Aggregate Demand

Factors that can cause the AD curve to shift, including changes in consumer confidence, government spending, and the money supply.

Sticky Input Prices

A situation in the short run where input prices do not immediately adjust to changes in output prices.

Stagflation

An economic condition characterized by stagnant growth, high unemployment, and high inflation.

Negative Slope of AD Curve

The AD curve slopes downwards due to the real wealth effect, net export effect, and interest rate effect.

Expansionary Gap

The situation when the actual GDP exceeds potential GDP, potentially resulting in inflation.

Contractionary Gap

The condition where the actual GDP is less than potential GDP, indicating underutilization of economic resources.

Equilibrium Level of Real GDP

The level of output where aggregate demand equals aggregate supply in the economy.

Expansionary Fiscal Policy

An increase in government spending or a decrease in taxes to stimulate the economy.

Cost-Push Inflation

Inflation caused by an increase in prices of inputs, which leads to decreased supply.

Demand-Pull Inflation

Inflation that occurs when demand for goods and services exceeds their supply.

Potential GDP

The maximum output an economy can produce without generating inflation.

Automatic Stabilizers

Economic policies and programs that automatically help stabilize the economy, such as unemployment insurance.