Aggregate Supply and Demand Model

Flashcards covering essential vocabulary from the Aggregate Supply and Aggregate Demand lecture notes.

Economics

A science of thinking in terms of models that analyze the discrepancies between material conditions over time.

Economic Model

A simplified representation of the real world, focusing on important factors for understanding interactions.

Comparative Statics

Analysis involving comparison of different equilibrium situations when variables change.

Aggregate Demand

The total quantity of real GDP macroeconomic players plan to demand at different price levels.

Aggregate Supply

The total quantity of real GDP macroeconomic players plan to supply at different price levels.

Potential GDP

The full-employment output modeled as the quantity of real GDP supplied when all inputs are fully employed.

Long-Run Aggregate Supply (LAS)

A vertical line indicating potential GDP where quantity does not change with price level adjustments.

Short-Run Aggregate Supply (SAS)

The quantity of real GDP that macroeconomic players plan to supply at different price levels in the short run.

Demand Shocks

Changes in external factors (like expectations, interest rates, or government policy) that shift the aggregate demand curve.

Supply Shocks

Unexpected events that impact supply, either negatively or positively influencing the price and quantity supplied.

Law of Aggregate Demand

As price level rises, aggregate quantity demanded of real GDP decreases.

Negative Supply Shock

An event that increases costs or reduces inputs, leading to a decrease in short-run aggregate supply.

Positive Supply Shock

An event that decreases costs or increases productivity, resulting in an increase in short-run aggregate supply.

Recessionary Gap

A situation where real GDP is below potential GDP, often due to negative demand shocks.

Inflationary Gap

A situation where real GDP exceeds potential GDP, typically caused by positive demand shocks.

Implicit Costs

Costs that are not immediately apparent but represent missed opportunities when resources are used.