first part of macro exam

Aggregate Demand (AD)

The total demand for goods and services in an economy across different price levels, represented by $AD = C + I + G + NX$.

Four components of Aggregate Demand

Consumption ($C$: household spending), Investment ($I$: business spending), Government purchases ($G$), and Net exports ($NX$: exports minus imports).

Three reasons the Aggregate Demand curve slopes downward

The wealth effect, the interest-rate effect, and the international-trade effect, each causing real GDP demanded to rise as the price level drops.

Determinants that shift Aggregate Demand to the right

An increase in household consumption, business investment, government spending, or net exports.

Determinants that shift Aggregate Demand to the left

A decrease in household consumption, business investment, government spending, or net exports.

Short-Run Aggregate Supply (SRAS)

The total quantity of goods and services businesses are willing to produce at different price levels in the short run; depicted as an upward-sloping curve.

Reason the Short-Run Aggregate Supply curve slopes upward

Wages and other input costs are slow to adjust (sticky), allowing firms to earn higher profit margins and expand output as product prices increase.

Determinants that shift Short-Run Aggregate Supply to the right

Decreased production costs, technological improvements, or increases in labor and resource productivity.

Determinants that shift Short-Run Aggregate Supply to the left

Increased costs of production, escalating energy prices, or adverse supply shocks.

Long-Run Aggregate Supply (LRAS)

A vertical curve representing potential real GDP, showing sustainable production when all economic resources are operating at full employment.

Determinants that shift Long-Run Aggregate Supply to the right

Long-term economic growth drivers, including a larger labor force, more capital accumulation, technological innovation, and higher total factor productivity.

Potential GDP

The level of real GDP that an economy can sustainably generate when labor, capital, and other inputs are at normal full employment.

Short-run macroeconomic equilibrium

The point where the Aggregate Demand ($AD$) curve intersects the Short-Run Aggregate Supply ($SRAS$) curve, establishing the actual price level and real output.

Long-run macroeconomic equilibrium

The intersection point where $AD$, $SRAS$, and $LRAS$ cross, where actual real GDP equals the economy's potential real GDP.

Recessionary gap

An output shortfall where actual real GDP falls below potential GDP, causing unused capacity and elevated unemployment.

Inflationary gap

An output gap where actual real GDP exceeds potential GDP, pushing resources past sustainable capacity and generating upward pressure on the price level.

Short-run macroeconomic effects of a rightward AD shift

Real GDP increases, the aggregate price level rises, and unemployment typically falls.

Short-run macroeconomic effects of a leftward AD shift

Real GDP falls, the aggregate price level drops, and unemployment typically rises.

Macroeconomic effects of a leftward SRAS shift

Real GDP decreases while the price level increases, a condition known as stagflation.

Static vs. Dynamic AD-AS models

The static model treats potential GDP as unchanging, whereas the dynamic model incorporates ongoing economic growth by shifting the $LRAS$ curve rightward over time.

Identification of a recessionary gap on an AD-AS graph

The short-run equilibrium point ($AD$ intersecting $SRAS$) is located to the left of the vertical $LRAS$ curve.

Identification of an inflationary gap on an AD-AS graph

The short-run equilibrium point ($AD$ intersecting $SRAS$) is located to the right of the vertical $LRAS$ curve.