Aggregate Demand and Supply Model

Flashcards covering key terms and concepts related to the Aggregate Demand and Supply Model based on lecture notes.

Aggregate Demand Curve

A curve showing the relationship between the inflation rate and the level of aggregate output when the goods market is in equilibrium.

Downward Sloping Curve

Indicates that as inflation rises, real interest rates increase which reduces aggregate demand.

Factors that Shift the AD Curve

Elements such as autonomous monetary policy, government purchases, net exports, taxes, and consumption that can cause the aggregate demand curve to shift.

Short-Run Aggregate Supply (SRAS) Curve

Curve that is upward sloping, indicating that as output rises relative to potential, inflation rises.

Long-Run Aggregate Supply (LRAS) Curve

Vertical curve at potential output level, determined by available production factors and technology.

Self-Correcting Mechanism

The process by which the economy returns to potential output over time.

Demand Shocks

Factors that cause the aggregate demand curve to shift, leading to changes in output and inflation.

Temporary Negative Supply Shock

An unfavorable supply shock that initially raises inflation and lowers output.

Permanent Positive Supply Shock

An event that increases potential output and shifts the LRAS curve to the right, lowering inflation and raising output.

Volcker Disinflation

A period during which Federal Reserve Chairman Paul Volcker raised interest rates to control high inflation.

General Equilibrium

Occurs when all markets are in equilibrium simultaneously, where aggregate output demanded equals aggregate output supplied.

Inflation Rate Adjustment

The process through which inflation stabilizes after shifts in the aggregate demand and supply.