Aggregate Demand/Aggregate Supply: A Macroeconomic Model and Concepts

Flashcards covering key concepts related to the Aggregate Demand/Aggregate Supply model and related macroeconomic principles.

What does the AD/AS model help us understand?

Key macroeconomic variables such as inflation, unemployment, RGDP, economic growth, and macroeconomic equilibrium.

What is the Aggregate Demand curve?

It represents the overall demand for goods and services in an economy, not just one good or service.

What does a downward sloping AD curve indicate?

It indicates the quantities of real GDP demanded at different price levels.

What happens to RGDP demanded when the price level increases?

RGDP demanded decreases.

What causes movements along the same AD curve?

Changes in the price level.

What is the relationship between price level and quantity of RGDP demanded?

There is an inverse relationship: as price level increases, RGDP demanded decreases.

What are the three effects that explain why the Aggregate Demand Curve is negatively sloped?

The wealth effect, the interest rate effect, and the open economy effect.

What does the wealth effect indicate?

As the price level increases, the value of real wealth decreases, leading to less RGDP demanded.

How does the interest rate effect influence RGDP demanded?

Higher price levels raise interest rates, discouraging investment and decreasing RGDP demanded.

What is the open economy effect related to Aggregate Demand?

Changes in price levels affect exports and imports, influencing net exports and therefore RGDP.

What are some shift factors for the Aggregate Demand curve?

Determinants such as consumption, investment, government spending, and net exports.

Why is the Short Run Aggregate Supply curve upward sloping?

In the short run, producers supply more output at higher price levels due to fixed input costs.

What are the two effects that explain the upward slope of the SRAS curve?

The profit effect and the misperception effect.

What defines the Long Run Aggregate Supply curve?

It is a vertical curve that represents potential output at the natural rate of RGDP.

What impact does technological advancement have on the Aggregate Supply curves?

It can shift the short-run and long-run aggregate supply curves to the right.

How can the addition of workers affect aggregate supply?

It increases aggregate supply by boosting productivity.

What indicates a recessionary gap in the AD/AS model?

The economy operates below potential output at a lower level of real GDP than RGDP NR.

What is indicated by an inflationary gap in the AD/AS model?

The economy is producing above potential output, leading to higher price levels.