Aggregate Demand and Aggregate Supply

A set of flashcards covering key concepts from the Aggregate Demand and Aggregate Supply lecture notes.

Aggregate Demand (AD)

The total amount that all consumers, firms, government agencies, and foreigners wish to spend on final goods and services.

Consumer Expenditure (C)

The total amount spent by consumers on newly produced goods and services, excluding new homes.

Investment Spending (I)

The sum of expenditures of business firms on new plant and equipment, and households on new homes.

Government Purchases (G)

Goods and services purchased by all levels of government.

Net Exports (X - IM)

The difference between exports (X) and imports (IM), indicating the trade balance.

Real Balance/Wealth Effect

As the price level rises, the purchasing power of money declines, leading to a decrease in the quantity of goods and services demanded.

Interest Rate Effect

As the price level rises, the demand for money increases, leading to higher interest rates and reduced spending.

Open Economy Effect/Net Export Effect

As the domestic price level rises, exports decrease and imports increase, reducing net exports.

Short-Run Aggregate Supply Curve (SAS)

A curve that reflects the positive relationship between price level and the quantity of goods supplied in the short-run.

Long-Run Aggregate Supply Curve (LAS)

A vertical line indicating that in the long-run, the quantity of real GDP supplied is independent of changes in the price level.

Inflationary Gap

The amount by which the equilibrium level of real GDP exceeds the full employment level of GDP.

Recessionary Gap

The amount by which the equilibrium level of real GDP falls short of the potential GDP.

Aggregate Supply

The total quantity of goods and services that all the nation's businesses are willing to produce for each possible price level.

Determinants of Consumer Spending

Factors influencing consumer expenditure, including wealth, income, government policy, and consumer indebtedness.

Shift of Aggregate Demand Curve

Changes in aggregate demand caused by changes in consumer spending, investment spending, government demand, or net exports.

Price Level

The current level of prices prevailing in the economy that affects the aggregate demand and supply.