chapter 16: aggregate demand and supply

aggregate demand curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

the wealth effect of a change in the aggregate price level

is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumer assets.

interest rate effect of a change in the aggregate price level

is the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers and firms money holdings.

aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

nominal wage

is the dollar amount of the wage paid

sticky wages

are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

short-run aggregate supply curve

shows the relationship between the aggregate price level and quantity of aggregate output supplied and the quantity of aggregate output supplied that exists in the short run, the time period many production costs can be taken as fixed.

long-run aggregate supply curve

shows the relationship between the aggregate price level and quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.

potential output

is the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

short run macroeconomic equilibrium

when the quantity of aggregate output supplied is equal to the quantity demanded.

short run equilibrium aggregate price level

is the aggregate price level in short run macroeconomic equilibrium

short run equilibrium aggregate output

is the quantity of aggregate output produced in the short run macroeconomic equilibrium

demand shock

an event that shifts the aggregate demand curve.

supply shock

an event that shifts the short run aggregate supply curve

stagflation

is the combination of inflation and falling aggregate output

long run economic equilibrium

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.

recessionary gap

when aggregate output is below potential output.

inflationary gap

when aggregate output is above potential output

output gap

is the % difference between actual aggregate output and potential output

stabilization policy

the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.