Aggregate Demand-Aggregate Supply Model

Flashcards for the Aggregate Demand-Aggregate Supply Model

Aggregate Demand

The total demand for final goods and services in an economy; it is the sum of spending in the economy.

Wealth effect

The change in the quantity of aggregate demand that results from wealth changes due to price-level changes.

Interest rate effect

Occurs when a change in the price level leads to a change in interest rates and therefore in the quantity of aggregate demand.

International trade effect

Occurs when a change in the price level leads to a change in the quantity of net exports demanded.

Long run

A period of time sufficient for all prices to adjust; the level of output produced when an economy is at the natural rate of unemployment (u*).

Short run

The period of time in which some prices have not yet adjusted.

Menu costs

The costs of changing prices; because of this expense, firms do not adjust their output price when the price level changes.

Money illusion

Occurs when people interpret nominal changes in wages or prices as real changes.

Long-run equilibrium

Reached when the quantity of aggregate demand is equal to the quantity of aggregate supply in the short run and long run (LRAS = SRAS = AD).