Macroeconomics Review

Vocabulary flashcards from lecture notes on macroeconomics.

Aggregate Demand (AD)

Total demand for all goods and services in an economy, composed of Consumption (C), Investment (I), Government Spending (G), and Net Exports (Exports - Imports). Formula: AD = C + I + G + (X - M).

Movement along the AD curve

When there is a change in the price level, affecting the real GDP but not changing the curve's fundamental position.

Shift of the AD Curve

When a non-price component of AD (C, I, G, X, or M) changes, causing the entire curve to move left or right.

Short-Run Price Stickiness

The phenomenon where prices are sticky or adjust slowly due to factors like firms' "wait and see" attitudes, adjustment costs, and long-term contracts.

Wage Setting Relation

Nominal wages are influenced by expected price level (Pe), unemployment rate (u), and other factors (z) like unemployment benefits and union strength.

Shifts of the Short-Run Aggregate Supply (SRAS) Curve

Curve can shift due to changes in the cost of production, changes in the expected price level, and changes in productivity.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve that represents the economy's potential output or full-employment level of output.

Output Gap

The difference between the actual output of an economy and its maximum potential output.

Stagflation

Characterized by a combination of inflation (rising price level) and stagnation or recession (falling real GDP and higher unemployment).

Aggregate Demand (AD)

The total quantity of goods and services demanded in an economy at various price levels over a given period. AD = C + I + G + (X - M).

Aggregate Supply (AS)

The total quantity of goods and services produced and supplied by an economy at various price levels over a given period.

Short-Run Aggregate Supply (SRAS) Curve

A curve that shows the relationship between the price level and the quantity of real GDP supplied by firms in the short run, holding other factors constant. It slopes upward.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve that represents the economy's potential output or full-employment level of output, determined by factors of production and technology, independent of the price level.

Consumption (C)

Household spending on goods and services.

Investment (I)

Spending by firms on new capital goods (e.g., factories, machinery) and by households on new housing.

Government Spending (G)

Spending by local, state, and federal governments on goods and services.

Net Exports (X - M)

The value of a country's exports minus the value of its imports.

Price Stickiness

The phenomenon where nominal prices are resistant to change, particularly downwards, in the short run.

Wage Setting Relation

The relationship describing how employees and employers set nominal wages, influenced by the expected price level, unemployment rate, and other factors.

Price Setting Relation

The relationship describing how firms determine the prices of their goods, based on their production costs (nominal wages) and a markup for profit.

Markup (μ)

The amount by which a firm's price exceeds its nominal wage cost, representing profit.

Real GDP (rY)

Gross Domestic Product adjusted for inflation; represents the actual volume of goods and services produced.

Deflation

A general decrease in the price level of goods and services.

Inflation

A general increase in the price level of goods and services.

Cost-Push Inflation

Inflation caused by a decrease in aggregate supply (e.g., due to increased production costs), leading to higher prices and lower output.

Demand-Pull Inflation

Inflation caused by an increase in aggregate demand, leading to higher prices and higher output.

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months.

Economic Boom

A period of rapid economic growth and expansion.

Output Gap

The difference between actual output and potential output; can be positive (inflationary) or negative (recessionary).

Potential Output

The maximum sustainable level of output an economy can produce when all its resources are fully and efficiently employed.

Stabilisation Policy

Government or central bank actions aimed at reducing short-run economic fluctuations and returning the economy to its potential output.

Fiscal Policy

Government decisions regarding spending and taxation to influence the economy.

Monetary Policy

Actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals.

Supply Shock

A sudden and unexpected event that changes the supply of a commodity or service.

Demand Shock

A sudden and unexpected event that changes the demand for goods and services.

Stagflation

A condition of slow economic growth and relatively high unemployment accompanied by rising prices.

Wealth Effect

The change in consumer spending that occurs when the value of consumers' financial assets changes.

Interest Rate Effect

The change in investment and consumption spending that occurs when changes in the price level affect the demand for money, which in turn affects interest rates.

IS-LM Model

A macroeconomic model that represents the interaction between the goods market (IS curve) and the money market (LM curve) to determine equilibrium interest rates and output in the short run.