Lecture 10 Flashcards

Flashcards on Aggregate Supply, Aggregate Demand, and the Aggregate Expenditure Model

Aggregate Supply-Aggregate Demand (AS-AD) Model

A model to explain how real GDP (RGDP) and price level are determined, how they interact, and business cycle fluctuations in RGDP and price level; also shows the relationship between unemployment rate and full employment.

Short-run Aggregate Supply (SAS)

The relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.

Long-run Aggregate Supply

The relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment; equals potential GDP regardless of price level.

Aggregate Demand (AD)

The relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same. AD = C + I + G + X - M

Demand-pull inflation

An inflation that starts because aggregate demand increases.

Cost-push inflation

When aggregate supply falls, the AS curve shifts leftward, and price increases due to factors such as oil price surges or increases in the cost of resources.

Aggregate Expenditure (AE) Model

Also known as the Keynesian model, it is the sum of planned consumption expenditure, planned investment, planned government expenditure, and planned net exports (exports minus imports); expenditures at a given price level.

Consumption Function

The relationship between consumption expenditure and disposable income, other things remaining the same.

Autonomous Consumption

Consumption expenditure when income is zero.

Marginal Propensity to Consume (MPC)

The fraction of a change in disposable income that is spent on consumption. MPC = ∆ in consumption expenditure / ∆ in disposable income

Marginal propensity to import (m)

Is the fraction of an increase in real GDP that is spent on imports. m = ∆ in imports / ∆ in real GDP

Expenditure Multiplier

The amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure that it generates. Multiplier = ∆ in equilibrium expenditure / ∆ in autonomous expenditure = ∆ Y / ∆ A