Aggregate Supply and Aggregate Demand

These flashcards cover key concepts from the aggregate supply and demand lecture, including potential GDP, short-run and long-run dynamics, and different economic theories.

What does potential GDP represent?

Potential GDP is the total amount that an economy is capable of producing when all resources are fully utilized.

What determines short-run aggregate supply?

Short-run aggregate supply is determined by fixed money wage rates and prices, while real output can vary based on demand.

What is the relationship between aggregate demand and price level?

The aggregate demand curve shows that as the price level increases, the quantity of real GDP demanded decreases.

What represents the condition of full employment?

At full employment, the quantity of real GDP supplied equals potential GDP, depending on the full employment quantity of labor.

How does the AD-AS model explain economic growth?

Economic growth is illustrated by a rightward shift in the long-run aggregate supply curve, reflecting increased potential GDP.

What happens to short-run aggregate supply when price levels rise without a change in nominal wage?

A rise in price levels, with constant nominal wage rates, increases the quantity of real GDP supplied.

What conditions lead to a leftward shift of the short-run aggregate supply curve?

A rise in the money wage rate or the prices of production factors can lead to a leftward shift of the short-run aggregate supply curve.

What does the aggregate demand multiplier describe?

The aggregate demand multiplier describes how initial changes in expenditure lead to larger overall changes in aggregate demand.

How do expectations influence aggregate demand?

Increased expectations for future income or inflation lead to higher current consumption, boosting aggregate demand.

What effect do fiscal policies have on aggregate demand?

Changes in taxes and government spending influence disposable income, thereby impacting consumption expenditure and aggregate demand.

What is the Keynesian view of the economy?

Keynesian economists believe that active fiscal and monetary policy is needed to maintain full employment, as the economy does not self-regulate.

What signifies a recessionary gap?

A recessionary gap occurs when potential GDP exceeds actual GDP, indicating underperformance in the economy.

What factors can shift the aggregate demand curve?

Factors include changes in expectations, fiscal policy, monetary policy, and global economic conditions.

What is the classical view regarding wages and prices?

Classical economists believe that wages and prices adjust quickly to changes in demand and supply.

How is potential GDP influenced by labor productivity growth?

Labor productivity growth occurs through capital accumulation and technological change, increasing potential GDP.

In the AD-AS model, what occurs during an inflationary gap?

An inflationary gap occurs when real GDP equals potential GDP, and the economy experiences upward pressure on prices.