Aggregate Demand and Supply Concepts

Flashcards covering key concepts from Chapter 20 on Aggregate Demand and Supply.

What does Aggregate Demand (AD) represent?

The total quantity of goods and services that households, firms, the government, and the rest of the world want to buy at each possible price level.

What is the shape of the Aggregate Demand Curve?

It is a downward-sloping curve.

What is the Wealth Effect in relation to Aggregate Demand?

When the price level falls, existing dollars can buy more, making consumers feel wealthier and more likely to spend.

How does the Interest Rate Effect influence Aggregate Demand?

A lower price level can lead to lower interest rates, making borrowing cheaper, which encourages investment and spending.

What does the Exchange Rate Effect refer to in Aggregate Demand?

A lower price level can make domestic goods cheaper relative to foreign goods, increasing net exports.

What factors can cause the AD curve to shift?

Changes in consumer spending, investment spending, government purchases, and net exports.

What is Short-Run Aggregate Supply (SRAS)?

It is the aggregate supply curve that is typically upward sloping, where some prices, especially wages, are sticky and don't adjust quickly.

Why does the SRAS curve slope upward?

If the price level rises unexpectedly, firms find that their revenues increase while input costs are temporarily fixed, leading them to increase output.

What can shift the Short-Run Aggregate Supply curve?

Changes in input prices, the expected price level, and technology.

What is Long-Run Aggregate Supply (LRAS)?

It is the aggregate supply curve that is vertical at the economy's natural rate of output.

Why is the LRAS curve vertical?

In the long run, all prices, including wages, are flexible; output is determined by resources and technology, not by the price level.

What determines short-run equilibrium in an economy?

The intersection of the AD curve and the SRAS curve.

What signifies long-run equilibrium in an economy?

When the AD curve, SRAS curve, and LRAS curve all intersect at the same point, indicating the economy is producing at its natural rate of output.

What effect do shifts in AD have on the economy?

They can cause short-run fluctuations in output and the price level.

What happens during a negative supply shock?

It shifts SRAS to the left, leading to lower output and a higher price level, often resulting in stagflation.

How does the economy adjust to return to long-run equilibrium?

If above potential output, wages and prices rise, shifting SRAS left; if below potential output, they fall, shifting SRAS right.

What does the AD-AS model help us understand?

Overall levels of prices and output, economic fluctuations, the difference between short-run and long-run effects, and the potential influence of government policies.