Key Concepts in Aggregate Demand and Supply Economics

Aggregate Demand- Aggregate Supply Model

combines aggregate demand data with aggregate supply data

Aggregate Demand Curve

shows the relationship between the demand for aggregate goods and services and the price level for all goods and services.

Aggregate Demand Shock

unexpected event that results in an increase or decrease in demand for goods and services.

Aggregate Demand

total demand for goods and services in an economy

Aggregate Supply

total output of goods and services in an economy

Appreciate

When currency (such as the US dollar) increases in value when compared to other currencies.

Automatic Stabilizers

fiscal policies that help moderate the fluctuations in an economy without government involvement.

Contractionary Fiscal Policy

Usually during a period of inflation; government decreases spending and raises taxes.

Cost- Push Inflation

When wages and cost of materials increase causing a supply issue resulting in higher prices for consumers.

Demand- Pull Inflation

When there is a supply shortage which cause aggregate prices to rise.

Depreciate

When currency (such as the US dollar) decreases in value when compared to other currencies.

Discretionary Policies

spending that results from policies or legislation that is not mandatory.

Disposable Income

income left over after paying mandatory bills

Equilibrium

When market demand and supply are balanced and prices are stable.

Exchange Rate Effect

Aggregate demand can be impacted by the currency exchange rate with other countries, which can impact price of goods.

Expansionary Fiscal Policy

Usually during a recession; government increases spending and lowers taxes.

Expenditure Multiplier

how much real GDP will change in response to an autonomous change in aggregate spending

Federal Poverty Line

the minimum amount of income required by a family in order to receive welfare benefits.

Fiscal Policy

Changes in taxes and spending by the federal government.

Government Transfers

payments to individuals with no goods or services given in return.

Income Tax

tax on an individual's income

Inflation

when the price levels in an economy increase over a period of time.

Interest Rate Effect

shows the impact changes in borrowing power has on prices and demand. If interest rates increase, the demand for borrowing declines.

Long Run

time when all cost and production can be changed. Unlike in the short run, produces can respond to long run market changes.

Long- Run Aggregate Supply (LRAS)

when price and wages can adjust to fluctuations in the economy. (Straight Line)

Long- Run Equilibrium

When the point of short- run equilibrium intersects with the long- run aggregate supply curve.

Long- Run Macroeconomic Equilibrium

when the long- run aggregate supply curve intersects with the short- run aggregate macroeconomic equilibrium.

Long- Run Supply Curve

shows the relationship between the quantity of aggregate output and aggregate price level if all prices were flexible.

Long- Run Supply Curve

shows the relationship between the quantity of aggregate output and aggregate price level if all prices were flexible. (This "curve" is vertical).

Mandatory Spending

programs that must be paid for with no services or goods in return.

Marginal Propensity to Consume (MPC)

percentage of income a consumer spends on goods and services compared to what they save.

Marginal Propensity to Save (MPS)

amount of new income not used for consumption.

Medicaid

public health insurance program for families with low income.

Multiplier Effect

the increase or decrease in one economic activity can impact other economic activities.

Multiplier

economic factor that can change and cause changes in other areas.

Negative Demand Shock

decrease in aggregate demand (demand curve shifts to the left).

Negative Supply Shock

results in lower aggregate supply (Supply curve shifts to the left).

Nominal Price Rigidity

prices of goods and services that are fixed.

Nominal Wages

not easily changed and includes the dollar amount paid to employees.

Output Gap

difference between full employment output and real GDP.

Positive Demand Shock

increase in aggregate demand (demand curve shifts to the right).

Positive Supply Shock

results in higher aggregate supply (Supply curve shifts to the right).

Potential Output

level of real GDP if all wages and prices were fully flexible; also called full employment output.

Pricing Power

ability of a business to change the price and output of a good depending on the profitability of an item.

Profitability

extent to which something yields a profit.

Progressive Taxation

The higher an individual's income the larger the tax on their income.

Short Run

producers have fixed and variable costs that restrict their ability to respond to market changes.

Short- Run Aggregate Supply (SRAS)

total output of goods and services over a certain time period when production costs can be considered fixed.

Short- Run Aggregate Supply Curve

model that shows the positive relationship between the aggregate output and aggregate price level.

Short- Run Equilibrium Aggregate Output

when employment is stable in an economy and there is low unemployment.

Short- Run Equilibrium Aggregate Price Level

when an economy's price levels are stable.

Short- Run Macroeconomic Equilibrium

When the aggregate demand equals the amount of aggregate output.

Social Insurance (Entitlements)

benefit provided to individuals who are eligible.

Stagflation

When an economy experiences high inflation with high unemployment.

Sticky Wages

when nominal wages are slow to respond to changes in the economy.

Supplemental Nutrition Assistance Program (SNAP)

gives vouchers to low-income households to buy food.

Supply Shock

unexpected event that results in an increase or decrease in the supply of goods and services.

Tax Multiplier

A change in the tax amount impacts spending and GDP.

Unemployment Insurance

gives individuals who are experiencing unemployment some money.

Wealth Effect

impact the aggregate price level has on consumer spending. As the price increases, the demand curves downward.