Chapter 12: Aggregate Demand and Aggregate Supply

aggregate demand-aggregate supply (AD-AS) model

The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and real domestic output (real gross domestic product).

aggregate demand

A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels.

real-balances effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.

interest-rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

foreign purchases effect

The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.

determinants of aggregate demand

Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve. These include changes in consumer spending, changes in investment spending, changes in government spending, and changes in net export spending

aggregate supply

A schedule or curve showing the total quantity of goods and services that would be supplied (produced) at various price levels.

immediate-short-run aggregate supply curve

A horizontal aggregate supply curve that applies to time periods over which both input prices and output prices are fixed; an aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts.

short-run aggregate supply curve

An upward sloping aggregate supply curverelevant to time periods over which input prices are fixed but output pricesare flexible; an aggregate supply curve for which real output and the price level bothchange when theaggregate demandcurve shifts.

long-run aggregate supply curve

A vertical aggregate supply curve relevant to time periods over which input prices and output prices are both fully flexible; an aggregate supply curve for which theprice level, but not real output, changes when theaggregate demandcurve shifts; a vertical aggregate supply curve that implies fully flexible prices.

determinants of aggregate supply

Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve. These include changes in input prices, changes in productivity, changes in legal-institutional environment

productivity

A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.

total outputs/total inputs

equilibrium price level

In the aggregate demand–aggregate supply (AD-AS) model, the price level at which aggregate demand equals aggregate supply; the price level at which the aggregate demand curve intersects the aggregate supply curve.

equilibrium real output

The gross domestic product at which the total quantity of final goods and final services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.