macro

YF

Full sustainable capacity GDP and the point of Natural rate of unemployment.

Long Run Aggregate Supply (LAS)

A vertical line at YF, independent of price level and represents full/potential sustainable GDP.

Short Run Aggregate Supply (AS)

Shows the relationship between productive capacity and inflation pressure as GDP approaches or exceeds YF.

Aggregate Demand (AD)

Shows the relationship between price level and quantity of goods/services demanded; determines current real GDP and current price level.

Aggregate Expenditure (AE)

The total amount of spending in the economy, represented by AE = C + I + (G - T) + (X - M).

Consumption (C)

Consumer spending, typically 65–70% of AD, usually stable.

Investment (I)

Spending on capital/inventories, which is volatile and driven by optimism or fears.

Government Spending (G)

Government purchases/spending that influences AD.

Taxes (T)

Government taxation that affects AD; more T shifts AD left and less T shifts AD right.

Exports (X)

Foreign spending on domestic goods, which, when increased, shifts AD right.

Imports (M)

Domestic spending on foreign goods, which, when increased, shifts AD left.

Trade Balance (X-M)

Indicates the difference between exports and imports; affects AD based on whether there is a surplus or deficit.

Stagflation

Occurs when AS shifts up/left, leading to rising inflation, rising unemployment, and falling GDP.

Great Depression Example

AD collapsed, leading to a sharp fall in GDP, over 25% unemployment, and deflation.

World War II Example

Dramatic increase in government spending which increased AD, GDP, and lowered unemployment to approximately 1%.

Economic Growth

Represented by LAS shifting right, indicating growth in potential GDP.