Macroeconomics: Aggregate Demand, Aggregate Supply & Fiscal Policy

This set of flashcards covers key concepts in macroeconomics related to aggregate demand, aggregate supply, and fiscal policy, focusing on their definitions and implications.

Aggregate Demand (AD)

Total quantity of goods & services demanded at different price levels, downward sloping.

Aggregate Supply (AS)

Total quantity of goods & services firms produce at different price levels.

Short-Run Aggregate Supply (SAS)

Upward sloping; nominal wages are sticky, meaning prices increase and output increases.

Long-Run Aggregate Supply (LRAS)

Vertical at full employment/output potential (Yf); price changes do not affect output.

Equilibrium

The intersection of AD and AS curves which determines the price level and real GDP.

GDP Components - C

Consumption: Household spending; the largest share of GDP.

GDP Components - I

Investment: Business spending on capital, inventories, and residential construction.

GDP Components - G

Government Spending: Direct purchases of goods & services, excluding transfer payments.

GDP Components - NX

Net Exports: Exports minus imports; affected by domestic price changes.

Wealth Effect

As prices increase, real wealth decreases, leading to lower consumption and demand.

Interest Rate Effect

As prices increase, the need for money increases, leading to higher interest rates and lower investment.

International Trade Effect

As domestic prices increase, domestic goods become more expensive, reducing net exports and demand.

Recessionary Gap

When actual output is below potential output (Y < Yf), leading to increased unemployment.

Inflationary Gap

When actual output is above potential output (Y > Yf), leading to upward pressure on prices.

Keynesian View on Prices/Wages

Sticky prices/wages lead to slow adjustment in the economy.

Classical View on Prices/Wages

Flexible prices/wages mean the economy self-corrects automatically.

Expansionary Fiscal Policy

Increasing government spending and/or decreasing taxes to increase aggregate demand.

Contractionary Fiscal Policy

Decreasing government spending and/or increasing taxes to decrease aggregate demand.

Multiplier Effect

A small change in government spending leads to a larger change in overall income.

Multiplier Formula

ΔY = 1/(1-MPC) × ΔG; where MPC is the marginal propensity to consume.