Chapter 13: The AD-AS Model Part 1

Comprehensive vocabulary flashcards reviewing the concepts, shifters, graphs, and underlying theories of the Aggregate Demand and Aggregate Supply (AD-AS) model.

Business Cycles

Short-run economic fluctuations characterized by expansions—where real GDP rises and unemployment falls—and recessions, where real GDP declines or plateaus and unemployment spikes.

Aggregate Demand (AD)

The total demand for all final goods and services across the economy, representing the spending side and calculated as $AD = C + I + G + NX$.

Aggregate Supply (AS)

The total supply of all final goods and services produced within the economy, representing the production side.

Aggregate Demand Curve

A downward-sloping curve illustrating the inverse relationship between the total quantity of aggregate demand and the overall price level as measured by the GDP deflator.

Wealth Effect

The change in the quantity of aggregate demand caused by changes in purchasing power due to price level changes; when the price level rises, real wealth falls, leading to reduced consumption.

Interest Rate Effect

The change in aggregate demand resulting from price level changes that reduce real wealth and savings, driving up interest rates and the cost of borrowing, which subsequently decreases investment spending.

International Trade Effect

The inverse relationship between the domestic price level and net exports, where higher domestic prices make domestic goods relatively more expensive and foreign goods relatively cheaper, decreasing net exports ($NX$).

Movement Along the AD Curve

A change in the quantity of aggregate demand caused exclusively by a change in the overall price level via the wealth, interest rate, and international trade effects.

Shift in the AD Curve

An alteration in aggregate demand caused by non-price factors that affect consumption ($C$), investment ($I$), government spending ($G$), or net exports ($NX$).

Long Run (in Macroeconomics)

A conceptual timeframe sufficient in length for all market prices, input costs, wages, and contracts to fully adjust throughout the economy.

Short Run (in Macroeconomics)

A period of time during which some prices and nominal wages have not yet fully adjusted and remain sticky.

Full-Employment Output ($Y^*$)

The sustainable potential production level of an economy achieved when unemployment is at its natural rate ($u^*$); determined solely by resources, technology, and institutions.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve positioned at full-employment output ($Y^*$), demonstrating that the economy's sustainable long-run output is independent of the aggregate price level.

Shifts in Long-Run Aggregate Supply

Permanent alterations in an economy's productive capacity caused by changes in resources (natural, human, or physical capital), technology, or institutions, moving full-employment output from $Y^*$ to a new level.

Short-Run Aggregate Supply (SRAS) Curve

An upward-sloping supply curve showing the positive relationship between the price level and the total quantity of output supplied in the short run.

Sticky Input Prices

The phenomenon where nominal wages and contractual resource costs adjust slowly, allowing rising output prices to temporarily widen profit margins and expand production in the short run.

Menu Costs

The physical and operational costs of altering published prices, which can incentivize firms to increase output instead of immediately adjusting prices when demand rises.

Money Illusion

The behavioral tendency of individuals to interpret nominal wage or price adjustments as real economic changes, making workers resistant to nominal wage reductions even during deflation.

Shifts in the Short-Run Aggregate Supply Curve

Movements of the SRAS curve caused by changes in input costs (such as nominal wage adjustments or oil prices) or temporary supply disruptions, without necessarily shifting the LRAS curve.

Supply Shock

A sudden, unexpected event (such as an oil pipeline break or natural disaster) that temporarily impacts resource availability and input prices, shifting the SRAS curve.