Section 3.2 Aggregate Demand & Aggregate Supply Vocabulary

Aggregate-demand (AD)

The total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Aggregate-supply (AS)

The total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

Model of aggregate demand and aggregate supply

The model that most economists use to explain short-run fluctuations in economic activity around its long-run trend.

Natural rate of output

The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.

Recession

a period of declining real incomes and rising unemployment

Stagflation

a period of falling output and rising prices

Full Employment

This is the level at National Income at which everyone who wants to work is able to. There is in other words sufficient demand to employ everyone. Classical economists argued that the economy would automatically tend to this equilibrium, whereas Keynesians said that it was the role of government, through their policy, to ensure we got there.

Natural Rate of Unemployment

The level of unemployment that is associated with a constant rate of inflation. Is also the level of unemployment that still exists in the economy when the labor market is in equilibrium. This will usually be equivalent to the level of voluntary unemployment as at equilibrium everyone who wants a job has got one.

Inflationary Gap

This occurs when there is too much demand in the economy. This excess level of demand will tend to lead to demand-pull inflation.

Deflationary (Recessionary) Gaps

exists when there is insufficient demand available in the economy to generate a full-employment equilibrium. In other words there is not enough being bought to provide jobs for everyone who wants them.

Short-Run Aggregate Supply Curve (SRAS)

A graphical representation of the short-run relation between real production and the price level, holding all ceteris paribus ply determinants constant. The SRAS, curve is one of two curves that graphical capture the supply-side of the aggregate market. The positive slope of the SRAS curve captures the direct relation between real production and the price level that exists in the short run.

Lon-Run Aggregate Supply Curve (LRAS)

The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a period of time in which all prices, especially wages, are flexible, and have achieved their equilibrium levels. Is one of two aggregate supply alternatives, distinguished by the degree of price flexibility.

Consumer confidence

is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.

Business confidence

An indicator designed to measure the degree of optimism on the state of the economy that business owners are expressing through their activities of investing and spending.

Ratchet Effect

an effect that occurs when a price or wage increases as a result of temporary pressure but fails to fall back when the pressure is removed

Monetarist /new classical model

This model relies on the importance of the price mechanism in coordinating economic activities and because of competitive markets will automatically tend toward full employment without government intervention.

Keynesian model of the aggregate supply curve

Implies that the aggregate supply curve contains two segments. One segment is more or less horizontal, indicating that price rigidity in the downward direction results in a reduction in real production. The other segment is more of less vertical, indicating that full employment is more or less maintained at higher price levels.

Consumption (C)

spending by households on consumer goods and services over a period of time.

Investment (I)

The addition of capital stock to the economy or expenditure by firms on capital.

Government spending (G)

Spending by all levels of government on goods and services

Net Exports (X-M)

Exports revenue minus import expenditures.

Keynesian model

The model is based on the need for government intervention in the economy and it is essential for the government to help in the management of aggregate demand in order to ensure full employment.

Aggregate demand curve

A curve showing the relationship between the average price level and the real GDP.

Import expenditures

Value of spending on imports.

Export revenue

Value of exports earned by producers.

Interest rate

the price of credit/borrowing money.

Sticky Prices

The resistance of a price (or set of prices) to change, despite changes in the broad economy that suggest a different price is optimal. When applied to prices, it means that the prices charged for certain goods are reluctant to change despite changes in input cost or demand patterns.