Aggregate Demand and Supply Analysis in Economics

Aggregate Demand

Total demand for goods and services in an economy.

Consumption Expenditure

Total demand for consumer goods and services.

Planned Investment Spending

Business spending on capital goods and new homes.

Government Purchases

Spending by government on goods and services.

Net Exports

Foreign spending on domestic goods minus imports.

Downward Sloping Curve

Aggregate demand curve slopes down due to price level decrease.

Quantity Theory of Money

Money supply affects nominal aggregate spending at constant velocity.

Factors Shifting Aggregate Demand

Changes in C, I, G, NX shift AD curve.

Increase in Money Supply

Shifts aggregate demand curve to the right.

Long-Run Aggregate Supply (LRAS)

Determined by capital, labor, and technology availability.

Natural Rate of Output

Output level at natural rate of unemployment.

Short-Run Aggregate Supply (SRAS)

Upward sloping due to sticky wages and prices.

Shifts in LRAS

Increased capital, labor, or technology shifts LRAS right.

Sticky Wages and Prices

Wages and prices adjust slowly to changes.

Self-Correcting Mechanism

Economy adjusts to return to long-run equilibrium.

Temporary Supply Shock

Short-term disruption affecting supply and prices.

Permanent Supply Shock

Long-term disruption affecting supply and prices.

Business Cycle Fluctuations

Economic ups and downs, like the 2007-2009 crisis.

Rightward Shift in AD Curve

Increased spending leads to higher aggregate demand.

Leftward Shift in AD Curve

Decreased spending leads to lower aggregate demand.

Natural Rate of Unemployment

Unemployment rate when economy is at full employment.

Short-Run Aggregate Supply Curve

Shifts due to expected inflation, price shocks, output gaps.

Expected Inflation

Anticipated increase in prices affecting supply decisions.

Price Shocks

Sudden changes in prices impacting supply dynamics.

Persistent Output Gap

Long-term difference between actual and potential output.

General Equilibrium

All markets in equilibrium simultaneously in the economy.

Short-Run Equilibrium

Aggregate output demanded equals aggregate output supplied.

Equilibrium Level of Output

Quantity of output at which demand equals supply.

Inflation Rate at Equilibrium

Rate of inflation at equilibrium output level.

Self-Correcting Mechanism

Economy returns to natural rate of output over time.

Wage Inflexibility

Wages do not adjust easily, especially downward.

Active Government Policy

Government intervention needed to stabilize the economy.

Flexible Wages and Prices

Wages and prices adjust quickly to economic changes.

Demand Shocks

Events causing shifts in the aggregate demand curve.

Temporary Supply Shocks

Short-term disruptions affecting supply without long-term shifts.

Negative Supply Shock

Supply restriction causing commodity prices to rise.

Positive Supply Shock

Supply increase leading to lower inflation and higher output.

Permanent Supply Shocks

Long-term disruptions that shift the long-run supply curve.

Real Business Cycle Theory

Economic fluctuations arise from permanent supply shocks.

Potential Output

Maximum sustainable output level of an economy.

Long-Run Aggregate Supply Curve

Represents economy's potential output at full employment.

Commodity Prices

Prices of goods that can be affected by supply shocks.

Aggregate Demand Curve

Represents total quantity of output demanded at various prices.

Aggregate Demand Curve

Represents total demand for goods/services in economy.

Short-Run Effects

Changes in output occur only temporarily.

Long-Run Effects

No change in output; economy self-corrects.

Temporary Supply Shock

Affects output and inflation temporarily.

Permanent Supply Shock

Affects output and inflation both short and long term.

Self-Correcting Mechanism

Economy returns to potential output over time.

Phillips Curve

Negative correlation between unemployment and inflation.

Short-Run Phillips Curve

Shows trade-off between unemployment and inflation temporarily.

Long-Run Phillips Curve

No trade-off between unemployment and inflation over time.

Expectations-Augmented Phillips Curve

Adjusts for inflation expectations affecting unemployment correlation.

Supply Shocks

Changes output capacity from existing resources.

Adaptive Expectations

Inflation expectations based on past inflation rates.

Short-Run Aggregate Supply Curve

Relationship between output quantity and inflation rate.

Output Gap

Difference between actual output and potential output.

Okun's Law

Describes relationship between unemployment gap and output gap.

Unemployment Gap

Difference between actual unemployment and natural rate.

Natural Rate of Unemployment

Long-term average unemployment rate in economy.

Inflation Shock

Rapid increase in inflation due to supply shocks.

Business Cycle Episodes

Fluctuations in economic activity over time.

UK Financial Crisis

Economic downturn in the UK, 2007-2009.

China Financial Crisis

Economic downturn in China, 2007-2009.

Inflation Rate

Percentage increase in price level over time.

Potential Output

Maximum sustainable output an economy can produce.