Chapter 20: Aggregate Demand and Aggregate Supply

This set of flashcards covers key vocabulary and concepts from Chapter 20 of the Principles of Macroeconomics, focusing on aggregate demand and supply, economic fluctuations, and associated theories.

Economic fluctuations

Irregular and unpredictable changes in economic activity, often referred to as the business cycle.

Aggregate Demand (AD) Curve

The curve that shows the quantity of goods and services demanded across the economy at each price level.

Aggregate Supply (AS) Curve

The curve that shows the total quantity of goods and services that firms produce and sell at any given price level.

Short-Run Aggregate Supply (SRAS) Curve

The curve that is upward sloping, indicating a positive relationship between the price level and the quantity of goods and services supplied in the short run.

Long-Run Aggregate Supply (LRAS) Curve

The vertical curve representing the economy’s output when it is at full employment, based on labor, capital, and technology.

Wealth Effect

The tendency for consumer spending to increase when the value of assets rises.

Interest-Rate Effect

The impact on investment spending due to changes in interest rates when the price level changes.

Exchange-Rate Effect

The effect on net exports when a change in the domestic price level alters the value of the domestic currency.

Recession

A period of falling real incomes and rising unemployment, typically identified by two successive quarters of GDP decline.

Depression

A severe and prolonged downturn in economic activity.

Business Cycle

The fluctuations in economic activity characterized by periods of economic expansion and recession.

Nominal variables

Variables measured in monetary units.

Real variables

Quantities measured in physical units, adjusted for changes in price.

Sticky Wage Theory

An explanation of why wages are slow to adjust based on expected price levels, affecting employment and output.

Sticky Price Theory

The phenomenon where many prices do not adjust immediately in response to changing economic conditions.

Misperceptions Theory

Describes how firms may confuse changes in the overall price level with changes in their specific prices, affecting output.

Natural rate of output

The economy's output at which unemployment is at its natural rate.

Four Steps in Analyzing Economic Fluctuations

1) Identify the shifting curve (AD or AS). 2) Determine the direction of the shift. 3) Analyze changes in Y and P using the AD-AS diagram. 4) Evaluate the transition to a new long-run equilibrium.