Important Terms

Aggregate demand and aggregate supply model

a model that explains short-run fluctuations in real GDP and the price level

Aggregate Demand (AD) curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government (both inside and outside of the country)

Short-run Aggregate Supply (SRAS) curve

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.

4 components of GDP

1. Consumption (C)

2. Investment (I)

3. Government purchases (G)

4. Net Exports (NX)

Nominal Assets

items that have value and are owned by an individual or organization

Movement along the AD curve will occur when _____ _____ changes and is NOT caused by a componentof real GDP changing

price level

A shift of the AD curve will occur when a _________ changes

component of real GDP

Monetary Policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.

Fiscal Policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Aggregate Supply

the quantity of goods and services that firms are willing and able to supply

Long-run Aggregate Supply (LRAS) curve

A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

Sticky

does not respond quickly to changes in demand or supply

3 reasons SRAS Curve is Upward Sloping

1. Contracts make some wages and prices sticky

2. Firms are often slow to adjust wages

3. Menu costs make some prices sticky

Supply Shock

an unexpected event that causes the short-run aggregate supply curve to shift

Long-run Macroeconomic Equilibrium

when the AD and SRAS curves intersect at the LRAS level; when the economy is in short-run equilibrium, and GDP is at its full-employment level

Stagflation

combination of inflation and recession, usually resulting from a supply shock

Main Factors that caused the Great Recession

1. The end of the housing bubble

2. The financial crisis

3. The rapid increase in oil prices during 2008

Keynesian Economics

a school of thought that focuses on the idea that government intervention can help stabilize the economy

Monetarism

the macroeconomic theories of Milton Friedman the idea that the quantity of money should be increased at a constant rate

Monetary Growth Rule

a plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions

New Classical Macroeconomics

emphasizes rational expectations, suggesting that individuals form forward-looking, unbiased predictions based on all available information.

Real Business Cycle Model

focuses on real, rather than monetary, causes of the business cycle

Austrian School of Economics

argues for the superiority of the market system over economic planning

Labor Theory of Value

attributed all of the value of a good or service to the labor embodied in it.