Chapter 16: Aggregate Demand and Aggregate Supply

This set of flashcards covers essential vocabulary and concepts from Chapter 16 of Aggregate Demand and Aggregate Supply, focusing on the relationships and factors that affect aggregate economic performance.

Aggregate Demand Curve

Illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy.

Aggregate Supply Curve

Illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.

Short Run vs Long Run AS

The aggregate supply curve differs between the short run and the long run due to wage and price stickiness.

AD-AS Model

A model used to analyze economic fluctuations and the interactions of aggregate demand and aggregate supply.

Recession

A significant decline in economic activity across the economy, lasting more than a few months.

Total (Aggregate) Demand

The overall demand for goods and services within an economy at a given price level.

Total (Aggregate) Supply

The total supply of goods and services that firms in an economy produce at a given overall price level.

Movement down the AD Curve

Leads to a lower aggregate price level and higher aggregate output.

Wealth Effect

A situation where an increase in the price level reduces the purchasing power of household wealth.

Interest Rate Effect

A situation where a higher aggregate price level results in increased interest rates, reducing consumer and investment spending.

Shifts in AD Curve

Changes in expectations, wealth, or government policies that cause the aggregate demand curve to shift.

Fiscal Policy

Government adjustments in spending levels and tax rates to influence a nation’s economy.

Monetary Policy

The process by which the central bank manages the money supply to achieve specific goals.

Expectations

Consumers' and firms' assessments of future economic conditions which influence their spending behavior.

Stock of Physical Capital

The total value of physical assets (machinery, buildings, etc.) that firms have available for production.

Nominal Wages

The dollar amount of wages paid to workers, not adjusted for inflation.

Sticky Wages

Wages that do not adjust immediately to changes in labor market conditions.

Commodity Prices

The prices for raw materials and basic goods used in commerce.

Productivity

A measure of the efficiency of production, often calculated as output per unit of input.

Potential Output

The level of real GDP that the economy could produce if all resources were used efficiently.

Inflationary Gap

Occurs when aggregate output is above potential output, typically leading to rising prices.

Recessionary Gap

Occurs when aggregate output is below potential output, usually associated with high unemployment.

Short-Run Equilibrium

The condition in which the quantity of output supplied is equal to the quantity demanded at a given price level.

Long-Run Equilibrium

The state where the economy is producing at full employment, with all prices, including wages, fully flexible.

Negative Demand Shock

A sudden and unexpected decline in aggregate demand, leading to lower prices and output.

Positive Demand Shock

An unexpected increase in aggregate demand, resulting in higher prices and output.

Negative Supply Shock

A sudden decrease in the supply of goods and services, resulting in higher prices and lower output.

Positive Supply Shock

An unexpected increase in the supply of goods and services, leading to lower prices and higher output.

Stagflation

The combination of stagnant economic growth, high unemployment, and high inflation.

Supply Shock

An event that suddenly increases or decreases the supply of a commodity or service.

Demand Shock

An event that suddenly increases or decreases the demand for goods and services.

AD Curve

A graphical representation of the aggregate demand relationship in an economy.

SRAS Curve

The short-run aggregate supply curve depicting the relationship between price level and output in the short run.

Long-Run Aggregate Supply Curve

A curve that shows the relationship between the aggregate price level and output when prices are fully flexible.

Macroeconomic Equilibrium

The condition in which aggregate supply equals aggregate demand at an equilibrium price level.

Self-Correcting Mechanism

The process by which economic fluctuations are corrected by changes in prices and wages over time.

Economic Fluctuations

Variations in the level of economic activity over time, often causing booms and busts.

Active Learning

An instructional method that actively engages students in the learning process.

Aggregate Price Level

A measure of the overall level of prices in the economy at a specific time.

Short-Run Aggregate Output

The total output produced in the economy within a short time frame.

Government Policy Impact

The significant effect government actions have on aggregate demand and supply.

Macroeconomic Policy

Policies implemented by the government or central bank to influence the economy.