Economics for Today - Aggregate Demand and Supply

Flashcards covering key vocabulary and concepts related to aggregate demand and supply.

Aggregate Demand Curve (AD)

The curve that shows the level of real GDP purchased by households, businesses, government, and foreigners (net exports) at different possible price levels during a time period, ceteris paribus.

Real Balances Effect

The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value.

Interest-Rate Effect

The impact on total spending (and therefore real GDP) caused by the direct relationship between the price level and the interest rate.

Net Exports Effect

The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the net exports of an economy.

Nonprice-level determinants of aggregate demand

Consumption (C), Investment (I), Government spending (G), Net exports (X – M)

Aggregate Supply Curve (AS)

The curve that shows the level of real GDP produced at different possible price levels during a time period, ceteris paribus.

Keynesian Economics

Believes that unless an economy trapped in a depression or severe recession is rescued by an increase in aggregate demand, full employment will not be achieved and assumes that product prices and wages are fixed.

Classical economics

Believes that recessions naturally cure themselves because the capitalistic price system automatically restores full employment and prices and wages are completely flexible.

Keynesian range

The horizontal segment of the aggregate supply curve, which represents an economy in a severe recession.

Intermediate range

The rising segment of the aggregate supply curve, which represents an economy as it approaches full-employment output.

Classical range

The vertical segment of the aggregate supply curve, which represents an economy at full-employment output.

Macroeconomic Equilibrium

Occurs where the aggregate demand curve, AD, and the aggregate supply curve, AS, intersect.

Nonprice- level determinants of aggregate supply

Resource prices (domestic and imported), Technological change, Taxes, Subsidies, Regulations

Cost-push inflation

An increase in the general price level resulting from an increase in the cost of production that causes the aggregate supply curve to shift leftward.

Demand-pull inflation

A rise in the general price level resulting from an excess of total spending (demand) caused by a rightward shift in the aggregate demand curve.

Stagflation

The condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously.