MacroEconomics Aggregate Demand and Supply

Aggregate Demand curve

Curve which shows the relationship between the aggregate price level and the quantity of aggregate output demanded by the economy as a whole

A change in aggregate price level on the purchasing power of consumer assets effects? What it this known as?

It effects consumers spending habits.

Known as Wealth effect of a change is aggregate spending.

A change in the aggregate price level on the purchasing power of consumers and firms money holdings effects? What is this known as?

It leads to a change in Consumer Spending and Investment Spending.

Known as The interest rate effect of a change in the aggregate spending.

Why does the Aggregate demand curve slope downward?

As a result of the wealth effect and Interest rate effect.

What shows a increase in Aggregate demand curve?

A shift to the right

What shows a decrease in aggregate demand curve?

A shift to the left

As the aggregate price level rises....

People want to buy less!

What may cause shifts in the aggregate demand and supply curve?

-Changes in Expectations

-Changes in Wealth

-Size of the existing stock of PHYSICAL CAPITAL

-Fiscal Policy(Taxes)

-Monetary Policy

Aggregate Supply curve

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

Nominal Wage

The dollar amount of the wage paid

Sticky Wages

nominal wages which 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

Aggregate supply curve, examined only in the short run, when many production costs can be taken as fixed

What leads to shifts in the short run aggregate supply curve?

-Changes in commodity prices

-Changes in nominal Wages

-Changes in productivity

Long-run aggregate supply curve

Shows aggregate supply curve that would exist if all prices, including nominal wages, were fully flexible.

What does the long-run aggregate supply curve look like?

A vertical line

Potential Output? Where is it on the long run supply curve?

Level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible! Located at point where supply curve meets x-axis

AD-AS curve is what?

Combination of Aggregate supply curve and aggregate demand curve in order to analyze economic fluctuations

Demand Shock? Supply Shock

An event which shifts the aggregate demand curve.

An event which shifts the short run aggregate supply curve

Stagflation

Combination of rising prices (Inflation) and decrease in aggregate output

Recessionary Gap

When aggregate output is below potential output

Inflationary gap?

When aggregate output is above potential output

Output gap? Equation?

percentage difference between actual aggregate output and potential output.

Output gap=(Actual aggregate output-Potential Output)/(Potential Output)

The economy is self correcting when...?

Shocks to aggregate demand affect aggregate output in the short run, but not the long run

Stabilization policy

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

What is most associated with a negative supply shock?

Stagflation

What does the AD-AS curve determine?

The level of output for an economy