Fundamentals of Economics 1: Aggregate Demand and Aggregate Supply

Key vocabulary terms and concepts from the lecture on Aggregate Demand and Aggregate Supply based on the provided transcript.

Aggregate Demand

The quantity demanded of all goods and services ($\text{Real GDP}$) at various price levels, ceteris paribus.

Real Balance (Wealth) Effect

The state where a fall in the price level causes the real purchasing power of money to rise, increasing a person’s monetary wealth and the quantity demanded of $\text{Real GDP}$.

Interest Rate Effect

An inverse relationship between the price level and the quantity demanded of $\text{Real GDP}$ established through changes in household and business spending sensitive to interest rate changes.

International Trade Effect

The inverse relationship between the price level and the quantity demanded of $\text{Real GDP}$ established through foreign sector spending, including imports and exports.

Monetary Policy

The action that a central bank takes to manage its money supply ($M_s$) or interest rate to achieve an economic goal.

Fiscal Policy

Changes in government spending ($G$) and taxes ($T$) which influence the level of disposable income.

Aggregate Supply

The quantity supplied of all goods and services ($\text{Real GDP}$) at various price levels, ceteris paribus.

Short Run Aggregate Supply (SRAS) Curve

A curve that slopes upward, indicating a positive relationship between the price level and the quantity of goods and services supplied.

Long Run Aggregate Supply (LRAS) Curve

A vertical line at the level of $\text{Natural Real GDP}$ showing that the price level does not affect the output level in the long run.

Natural Real GDP

The level of $\text{Real GDP}$ produced at the natural unemployment rate, representing the full-employment level of output.