Aggregate Demand and Aggregate Supply Flashcards

These flashcards cover key vocabulary and concepts related to economic fluctuations, the model of aggregate demand and aggregate supply, and various theories and historical examples of economic shifts.

Recessions

Periods of falling real incomes and rising unemployment.

Depressions

Severe and rare versions of recessions.

Classical Dichotomy

The separation of variables into two groups: real quantities and relative prices, and nominal variables measured in terms of money.

Monetary Neutrality

The proposition that changes in the money supply affect nominal variables but do not affect real variables.

Aggregate-Demand ($AD$) Curve

A curve showing the quantity of all goods and services demanded in the economy at each price level ($P$).

The Wealth Effect

The phenomenon where a decline in the price level ($P$) increases the real value of money, making consumers wealthier and increasing consumer spending ($C$).

The Interest-Rate Effect

The phenomenon where a lower price level ($P$) reduces the amount of money people need to hold, leading them to buy bonds, which decreases the interest rate and increases investment spending ($I$).

The Exchange-Rate Effect

The phenomenon where a lower U.S. price level ($P$) leads to lower interest rates, causing the U.S. dollar to depreciate and stimulating net exports ($NX$).

Natural Rate of Output ($Y_N$)

The amount of output produced when unemployment is at its natural rate; also referred to as potential output or full-employment output.

Long-Run Aggregate-Supply ($LRAS$) Curve

A vertical curve representing the natural rate of output, where the quantity of goods and services supplied is independent of the price level.

Short-Run Aggregate-Supply ($SRAS$) Curve

An upward-sloping curve showing the quantity of goods and services that firms produce and sell at different price levels over a period of 1 to 2 years.

Sticky-Wage Theory

The theory that nominal wages are slow to adjust in the short run based on the expected price level ($P^E$), meaning higher actual prices lower the real cost of labor and encourage firms to increase output.

Sticky-Price Theory

The theory that some firms adjust prices sluggishly due to menu costs, leading to higher demand for their relatively low-priced goods when the overall price level increases.

Menu Costs

The costs associated with adjusting prices, such as printing new price tags or the time required to change a menu.

Misperceptions Theory

The theory that firms mistakenly believe a rise in the overall price level is specifically a rise in the relative price of their own product, inducing them to increase production.

Aggregate Supply Equation

$Y = Y_N + a(P - P^E)$, where quantity of output supplied equals the natural rate of output plus a positive constant multiplied by the difference between the actual and expected price levels.

Stagflation

A period of simultaneous falling output and rising prices, often caused by an adverse shift in aggregate supply.

Quantitative Easing

A policy used during the 2008–2009 recession where the Federal Reserve purchased mortgage-backed securities and other private loans to increase liquidity.

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act of 2020, representing approximately $10\%$ of GDP in fiscal response to alleviate hardship from the pandemic.