Chapter 11: The Long Run Economy

These flashcards cover key concepts and definitions related to the long-run economy and aggregate supply.

Short Run

A period in which nominal wages remain fixed as the price level changes.

Long Run

A period in which nominal wages are fully responsive to changes in the price level.

Short-Run Aggregate Supply Curve

In the short run, the amount of aggregate supply varies directly with the price level because nominal wages are fixed.

Long-Run Aggregate Supply Curve

The long-run aggregate supply curve is vertical, indicating that nominal wages are fully flexible and real output remains constant at full-employment output.

Demand-Pull Inflation

Occurs when an increase in aggregate demand causes both the price level and real output to rise in the short run.

Cost-Push Inflation

Arises from factors that increase the cost of production, resulting in a leftward shift of the short-run aggregate supply curve.

Standard Recession

Occurs when aggregate demand declines, leading to a decrease in the price level and a potential cut in nominal wages by employers.

Self-Correction

The concept that the economy will adjust back to full-employment output without government intervention.

Economic Growth

Factors that increase the economy's growth rate, such as lower interest rates which encourage investment in capital goods.

Phillips Curve

Illustrates the inverse relationship between the inflation rate and the rate of unemployment in the short run.

Adverse Aggregate Supply Shocks

Unexpected increases in the cost of productive resources, causing the short-run aggregate supply curve to shift leftward.

Long-Run Phillips Curve

Demonstrates there is no long-run tradeoff between unemployment and inflation, as the economy returns to full employment regardless of the price level.