Aggregate Demand and Aggregate Supply

These flashcards cover key concepts and definitions related to aggregate demand and aggregate supply, as discussed in the lecture.

Aggregate Demand (AD)

A schedule or curve showing the amounts of real output (real GDP) that buyers collectively desire to purchase at each possible price level.

Real-balances effect

The effect that the real value of money balances decreases when the price level rises, leading to a decrease in the quantity of real GDP demanded.

Interest-rate effect

The inverse relationship where an increase in the price level leads to higher interest rates, resulting in a decrease in investment spending and a decrease in the quantity of real GDP demanded.

Foreign-trade effect

The phenomenon where a rise in the price level makes domestic goods more expensive compared to foreign goods, leading to a decrease in exports and an increase in imports, thus reducing the quantity of real GDP demanded.

Aggregate Supply (AS)

A schedule or curve showing the relationship between the price level of output and the amount of real domestic output firms produce.

Immediate Short Run

The time period where both input prices and output prices are fixed, leading to a horizontal aggregate supply curve.

Short Run

A period during which output prices are flexible while input prices are either totally fixed or highly inflexible.

Long Run

The period where all output and input prices are fully flexible, leading to the vertical long-run aggregate supply curve.

Demand-pull inflation

Inflation that occurs when aggregate demand increases faster than aggregate supply, leading to a rise in the price level.

Cost-push inflation

Inflation that occurs when the costs of production increase, causing firms to raise prices, leading to a leftward shift in the aggregate supply curve.

Equilibrium price level

The price level at which the quantity of real output supplied equals the quantity of real output demanded.

Recessionary GDP gap

The difference between an economy's potential GDP and its actual GDP during a recession.

Productivity

The measure of output per unit of input, where increases in productivity reduce per-unit costs and decreases in productivity increase per-unit costs.

Factors that shift Aggregate Demand

Consumer spending, investment spending, government spending, and net exports.

Factors that shift Aggregate Supply

Input prices, productivity, and the legal-institutional environment, including taxes and regulations.