Aggregate Demand & Aggregate Supply - Vocabulary Flashcards

Vocabulary-style flashcards covering key terms and definitions for Aggregate Demand and Aggregate Supply concepts from the lecture notes.

Aggregate Demand (AD)

Total spending on goods and services in a period; downward-sloping curve showing that as the price level falls, real output demanded rises; AD = C + I + G + (X − M).

Consumption (C)

Total spending by consumers on domestic goods/services; includes durable and non-durable goods.

Durables

Goods used over time (e.g., cars, computers).

Non-durables

Goods used quickly (e.g., rice, newspapers).

Investment (I)

Addition of capital stock to the economy; includes replacement investment and induced investment.

Replacement investment

Investment to maintain productivity by replacing worn-out capital.

Induced investment

Investment driven by higher demand/output; increases with higher expected output.

Government Spending (G)

Spending by all levels of government on goods/services; excludes transfer payments.

Net Exports (X − M)

Exports minus Imports; balance of foreigners’ purchases of domestic goods and residents' purchases of foreign goods.

Exports

Domestic goods/services bought by foreigners.

Imports

Foreign goods/services bought by residents.

X − M

Net exports; exports minus imports.

Shape of AD Curve

Downward sloping: as price level falls, quantity of output demanded rises.

Movement along the AD curve

A change in the average price level causing a movement along the curve; no change in AD components.

Shift of the AD curve

A change in the components of AD (C, I, G, (X − M)) causing the curve to move left or right.

Causes of Change in Consumption

Income taxes, interest rates, wealth, consumer confidence, and household indebtedness.

Causes of Change in Investment

Interest rates, business taxes, technological change, business confidence/expectations, corporate indebtedness.

Causes of Change in Government Spending

Political/economic priorities; increases may target industries, correct market failures, or expand education/healthcare.

Causes of Change in Net Exports

Exports depend on foreign income, exchange rates, trade policies, and relative inflation; Imports depend on national income, exchange rates, trade policies, and relative inflation.

Aggregate Supply (AS)

Total quantity of goods and services produced in an economy over a period at different price levels.

Short-run Aggregate Supply (SRAS)

Relationship between price level and real output when production costs (especially wages) are constant; essentially the sum of all firms’ supply curves.

Short run vs Long run

Short run: resource costs (especially wages) are fixed; Long run: resource costs are flexible and move with price level.

Wage rigidity

Wages are slow to adjust due to labor contracts, minimum wage laws, union resistance, and morale effects of wage cuts.

Shape of SRAS

Upward sloping: as output rises, costs rise (e.g., overtime pay), pushing prices up.

Shifts of SRAS

Caused by wage rates, costs of raw materials, prices of imports, indirect taxes/subsidies, and supply shocks.

Short-run equilibrium

set by the intersection of AD and SRAS; determines price level, real GDP, and employment.

Long-run Aggregate Supply (LRAS)

Shows potential output at full employment; debate between New Classical/Monetarist and Keynesian views.

New Classical LRAS

Vertical at full employment (Yf); belief that market forces return economy to Yf without government intervention.

Keynesian LRAS

Three phases: Elastic (spare capacity), Upward-sloping (resources scarcer, output rises with inflation), Inelastic (full capacity; output fixed, prices rise).

Shifts of LRAS

Caused by increases in quantity or quality of factors of production (similar to a PPC shift).

Yf

Full employment output (potential output).