Understanding the AD/AS Model in Macroeconomics

AD/AS Model

Aggregate demand and supply model in macroeconomics.

Aggregate Demand (AD)

Total demand for all goods and services.

Aggregate Supply (AS)

Total supply of all goods and services.

Price Level (PL)

Overall price level of everything in the economy.

Real GDP (RGDP)

Total output of an economy adjusted for inflation.

Wealth Effect

Higher prices reduce purchasing power, lowering demand.

Interest Rate Effect

Higher prices lead to increased borrowing costs.

Exchange Rate Effect

High prices decrease export demand from other countries.

Downward-Sloping AD Curve

Indicates inverse relationship between price level and RGDP.

Point A

Lower half of the AD curve indicating higher RGDP.

Point B

Upper left of the AD curve indicating lower RGDP.

C in RGDP Equation

Represents consumption in the GDP calculation.

I in RGDP Equation

Represents investment in the GDP calculation.

G in RGDP Equation

Represents government spending in the GDP calculation.

X in RGDP Equation

Represents exports in the GDP calculation.

M in RGDP Equation

Represents imports in the GDP calculation.

Nominal GDP

Total economic output without inflation adjustment.

Movement Along AD Curve

Change in price level causes movement along the curve.

Aggregate Quantity

Total quantity of goods and services produced.

Inverse Relationship

As one variable increases, the other decreases.

Demand Curve

Graph showing relationship between price and quantity demanded.

Supply Curve

Graph showing relationship between price and quantity supplied.

Macro vs Microeconomics

Macro focuses on economy-wide phenomena; micro on individual markets.

Economic Transactions

Actual buying and selling activities in the economy.

Aggregate Demand (AD) Curve

Shows total demand for goods/services in economy.

Movement along AD Curve

Reflects changes in price level affecting demand.

Shifting AD Curve

Occurs due to factors other than price level.

Consumer Confidence

Increased confidence shifts AD curve right.

Real Value of Assets

Higher asset value shifts AD curve right.

Physical Capital Stock

Low capital stock increases firm spending.

Government Policies

Includes fiscal and monetary policy tools.

Fiscal Policy

Government adjusts taxes and spending.

Monetary Policy

Central bank alters money supply in economy.

Stagflation

Economic condition of high inflation and unemployment.

Short-Run Aggregate Supply (SRAS)

Upward sloping curve reflecting short-term supply.

Long-Run Aggregate Supply (LRAS)

Vertical curve indicating full employment output.

Law of Supply

Producers supply more at higher prices.

Deflation

Decrease in aggregate price level.

Real GDP (RGDP)

Total economic output adjusted for inflation.

Profit Calculation

Price per unit minus production cost.

Nominal Wages

Fixed costs paid to workers.

Economic Distress

Severe economic downturn affecting employment.

OPEC Oil Ban

1973 embargo causing economic shock in US.

Great Depression

Severe economic collapse starting in 1929.

Speculation

Investing based on optimistic market expectations.

Unemployment Surge

Rapid increase in jobless rates during crises.

Aggregate Price Level

Overall level of prices in an economy.

Nominal wages

Compensation including benefits and healthcare.

Sticky wages

Wages slow to adjust to economic changes.

Short run

Period when production costs are fixed.

Long run

Period when production costs can adjust.

Economic expansion

Increase in economic activity and output.

Recession

Economic decline with reduced activity.

SRAS curve

Short-Run Aggregate Supply curve indicating output.

Productivity

Output per worker or efficiency of labor.

Expectations

Predictions about future inflation affecting wages.

Actions by government

Policies impacting business costs like taxes.

Resource prices

Costs of inputs like raw materials.

PEAR

A mnemonic for factors shifting SRAS.

Labor costs

Expenses associated with hiring employees.

Inflation

General increase in prices over time.

Subsidies

Government payments to support businesses.

Corporate taxes

Taxes imposed on business profits.

Input prices

Costs of materials needed for production.

Economic review

Annual assessment of employee performance and wages.

Worker dissatisfaction

Employee discontent leading to job changes.

Robotics infrastructure

Technology reducing labor hours in production.

Copper price increase

10% rise affecting electrical wiring costs.

Department of Labor forecast

Government prediction impacting wage negotiations.

Labor market

Supply and demand for workers in the economy.

Left Shift

Decrease in aggregate supply or demand.

Right Shift

Increase in aggregate supply or demand.

Productivity (P)

Efficiency of labor or resources in production.

Expectations (E)

Predictions affecting business decisions and investments.

Actions (A)

Government policies impacting economic performance.

Resource (R)

Inputs used in the production of goods.

Long-Run Aggregate Supply Curve (LRAS)

Vertical curve indicating potential output level.

Potential Output

Maximum sustainable output of an economy.

Full Employment

Average unemployment level in a healthy economy.

Production Possibility Curve (PPC)

Graph showing trade-offs between two goods.

Stagflation

High unemployment, low output, and high inflation.

Positive Demand Shock

Rightward shift of aggregate demand curve.

Negative Demand Shock

Leftward shift of aggregate demand curve.

Positive Supply Shock

Rightward shift of short-run aggregate supply curve.

Negative Supply Shock

Leftward shift of short-run aggregate supply curve.

Output Gap

Difference between actual and potential output.

Equilibrium

State where aggregate demand equals aggregate supply.

Deflation

General decrease in prices over time.

Labor Efficiency

Output produced per labor hour.

Corporate Taxes

Taxes imposed on company profits.

Commodity Prices

Market prices for raw materials.

Technical Education Investment

Government spending on workforce skill development.

Fiscal Policy

Government measures to influence economic activity.

Tax Cut

Reduction in taxes to stimulate economic growth.

AD/AS Model

Graphical representation of aggregate demand and supply.

Equilibrium E2

New balance point after economic shifts.

Price Level (PL)

Average level of prices in the economy.

Real GDP (RGDP)

Inflation-adjusted measure of economic output.

Inflationary Gap

When actual output exceeds potential output.

Demand-Pull Inflation

Inflation caused by increased demand.