Principles of Macroeconomics Chapter 9: Aggregate Demand and Aggregate Supply Analysis

Vocabulary flashcards covering the definitions, theories, and schools of thought related to Aggregate Demand and Aggregate Supply as presented in the lecture notes.

Aggregate demand and aggregate supply model

A model that explains short-run fluctuations in real GDP and the price level.

Aggregate demand (AD) curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

Short-run aggregate supply (SRAS) curve

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.

GDP Components Equation

The relationship defining GDP (Y) as the sum of consumption (C), investment (I), government purchases (G), and net exports (NX): $Y = C + I + G + NX$.

Wealth effect

The phenomenon where a fall in the price level increases the real value of household wealth, causing consumers to feel wealthier and spend more.

Interest-rate effect

The process where a lower price level reduces the money households need to hold, leading them to lend or deposit money, which drives down interest rates and encourages investment spending.

International-trade effect

The effect where a lower price level in Canada relative to other countries causes net exports to rise, increasing the quantity of goods and services demanded.

Potential GDP

The level of real GDP in the long run, also known as full-employment GDP, determined by the number of workers, capital stock, and available technology.

Long-run aggregate supply (LRAS) curve

A vertical line at potential GDP showing that changes in the price level do not affect the level of aggregate supply in the long run.

Sticky-Wage Theory

The theory that nominal wages adjust slowly in the short run due to labor contracts and social norms; if $P > P^E$, production becomes more profitable and firms increase output.

Menu costs

The costs associated with adjusting prices, such as the cost of printing new menus or the time required to change price tags.

Sticky-Price Theory

The theory that many prices adjust slowly due to menu costs; when the price level rises, firms that wait to raise prices see increased demand and therefore increase output.

Short-Run Aggregate Supply Equation

The mathematical expression for SRAS where output (Y) deviates from the natural rate ($Y_N$) based on the difference between the actual price level (P) and the expected price level ($P^E$): $Y = Y_N + a(P - P^E)$, where $a > 0$.

Automatic mechanism

The process of adjustment back to potential GDP that occurs without any actions by the government.

Stagflation

A combination of inflation and recession, typically resulting from a supply shock.

Keynesian revolution

The name given to the widespread acceptance during the 1930s and 1940s of John Maynard Keynes’ macroeconomic model.

Monetarism

The macroeconomic theories of Milton Friedman and his followers, which emphasize that the quantity of money should be increased at a constant rate.

Monetary growth rule

A plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions.

New Classical Model

The school of thought consisting of theories by Robert Lucas and others, centered on the idea that workers and firms have rational expectations.

Real business cycle model

A model that focuses on real factors like productivity shocks, rather than changes in the quantity of money, to explain fluctuations in real GDP.

Labour theory of value

The theory held by Karl Marx which attributes all of the value of a good or service to the labour embodied in it.