Chapter 24 - Aggregate demand, aggregate supply & business cycles

Aggregate demand

________ (AD) curve: curve that shows the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate, holding all other factors constant.

Aggregate supply

________ (AS) curve: curve that shows the relationship between the amount of output firms want to produce and the inflation rate, holding all other factors constant.

Long run

________ equilibrium: situation in which the AD and AS curves intersect at potential output Y*

Short run

________ equilibrium: situation where the AD and AS curves intersect at a level of real GDP that is above or below potential.

Business cycles

________ are caused by shifts in aggregate demand and aggregate supply.

Inflation

________ rises to eliminate an expansionary gap and falls to eliminate a recessionary gap.

Demand shocks

________: changes in planned spending that are not caused by changes in output or the inflation rate.

Inflation shock

________: sudden change in the normal behavior of inflation, unrelated to the nation's output gap.

Monetary policy rule

________: rule that describes how a central bank, like the Fed, takes action in response to changes in the state of the economy.

aggregate demand

Change in ________: shift of the AD curve.

Long-run equilibrium

situation in which the AD and AS curves intersect at potential output Y*

Short-run equilibrium

situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

Aggregate demand (AD) curve

curve that shows the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate, holding all other factors constant

Monetary policy rule

rule that describes how a central bank, like the Fed, takes action in response to changes in the state of the economy

Change in aggregate demand

shift of the AD curve

Demand shocks

changes in planned spending that are not caused by changes in output or the inflation rate

Aggregate supply (AS) curve

curve that shows the relationship between the amount of output firms want to produce and the inflation rate, holding all other factors constant

Change in aggregate supply

shift of the AS curve

Inflation shock

sudden change in the normal behavior of inflation, unrelated to the nation's output gap

Self-correcting property

fact that output gaps will not last indefinitely, but will be closed by rising or falling inflation

Long-run equilibrium

Situation in which the AD and AS curves intersect at potential output Y*

Short-run equilibrium

Situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

Aggregate demand (AD) curve

Curve that shows the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate, holding all other factors constant

Monetary policy rule

Rule that describes how a central bank, like the Fed, takes action in response to changes in the state of the economy

Change in aggregate demand

Shift of the AD curve

Demand shocks

Changes in planned spending that are not caused by in changes in output or the inflation rate

Aggregate supply (AS) curve

Curve that shows the relationship between the amount of output firms want to produce and the inflation rate, holding all other factors constant

Change in aggregate supply

Shift of the AS curve

Inflation shock

Sudden change in the normal behavior of inflation, unrelated to the nation's output gap

Self-correcting property

Fact that output gaps will not last indefinitely, but will be closed by rising or falling inflation