Aggregate Demand and Aggregate Supply (Part 1)

These flashcards cover the key concepts, definitions, and relationships related to Aggregate Demand and Aggregate Supply as presented in the lecture.

Aggregate Demand (AD)

Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by all sectors in the economy.

Inverse Relationship

As the aggregate price level increases, the quantity of aggregate output demanded decreases.

Aggregate Supply (AS)

Represents the quantity of output that producers are willing to supply at each aggregate price level.

Short-Run Aggregate Supply (SRAS)

The curve that describes the quantity of goods and services supplied at varying price levels in the short run, assuming prices and wages are sticky.

Long-Run Aggregate Supply (LRAS)

The curve that shows the quantity of output at full employment, where prices and wages are flexible.

Output Gap

The difference between the actual output (YSR) and the potential output (YFE); can be inflationary or recessionary.

Wealth Effect

As aggregate prices rise, the real value of wealth falls, leading to a decrease in consumption (C) and aggregate demand (AD).

Interest Rate Effect

When aggregate prices rise, interest rates increase, leading to a decrease in investment (I) and current consumption, causing aggregate demand to fall.

Natural Adjustment Mechanism

The process by which nominal wages adjust to eliminate the output gap, aligning short-run output with long-run potential output.

Equilibrium

A condition in which aggregate demand equals aggregate supply, either in the short run (SRAS) or long run (LRAS).