Aggregate Supply & Aggregate Demand Study Guide

These flashcards cover key concepts, definitions, and relationships in the Aggregate Supply and Aggregate Demand model, which are crucial for understanding macroeconomic theory.

Aggregate Supply (AS)

The relationship between the quantity of real GDP supplied and the price level.

Long-Run Aggregate Supply (LAS)

The relationship between real GDP supplied and price level when real GDP equals potential GDP.

Potential GDP

The maximum sustainable level of real GDP; the economy's full-employment output.

Short-Run Aggregate Supply (SAS)

The relationship between real GDP supplied and price level when money wage rate and prices of other resources remain constant.

Aggregate Demand (AD)

The relationship between the quantity of real GDP demanded and the price level.

Wealth Effect

As the price level rises, real wealth falls, causing consumption to decrease and quantity of real GDP demanded to decrease.

Intertemporal Substitution Effect

As the price level rises, real value of money falls, leading to higher interest rates and a decrease in quantity of real GDP demanded.

International Substitution Effect

As the price level rises, domestic goods become more expensive relative to foreign goods, reducing exports and increasing imports.

Fiscal Policy

Government's attempt to influence the economy through taxes, transfer payments, and government spending.

Monetary Policy

The Fed's attempt to influence the economy by changing interest rates and money supply.

Recessionary Gap

The amount by which real GDP is less than potential GDP.

Inflationary Gap

The amount by which real GDP exceeds potential GDP.

Economic Growth

Increases in potential GDP, resulting from labor force growth, capital accumulation, and technological advances.

Short-Run Equilibrium

Occurs when quantity of real GDP demanded equals quantity of real GDP supplied, located at the intersection of AD and SAS curves.

Long-Run Equilibrium

Occurs when real GDP equals potential GDP, located at the intersection of AD, SAS, and LAS curves.

Sticky Wages

The phenomenon where money wages do not adjust quickly, affecting the economy's movement towards equilibrium.

Aggregate Supply (AS)

The relationship between the quantity of real GDP supplied and the price level.

Long-Run Aggregate Supply (LAS)

The relationship between real GDP supplied and price level when real GDP equals potential GDP.

Potential GDP

The maximum sustainable level of real GDP; the economy's full-employment output.

Short-Run Aggregate Supply (SAS)

The relationship between real GDP supplied and price level when money wage rate and prices of other resources remain constant.

Aggregate Demand (AD)

The relationship between the quantity of real GDP demanded and the price level.

Wealth Effect

As the price level rises, real wealth falls, causing consumption to decrease and quantity of real GDP demanded to decrease.

Intertemporal Substitution Effect

As the price level rises, real value of money falls, leading to higher interest rates and a decrease in quantity of real GDP demanded.

International Substitution Effect

As the price level rises, domestic goods become more expensive relative to foreign goods, reducing exports and increasing imports.

Fiscal Policy

Government's attempt to influence the economy through taxes, transfer payments, and government spending.

Monetary Policy

The Fed's attempt to influence the economy by changing interest rates and money supply.

Recessionary Gap

The amount by which real GDP is less than potential GDP.

Inflationary Gap

The amount by which real GDP exceeds potential GDP.

Economic Growth

Increases in potential GDP, resulting from labor force growth, capital accumulation, and technological advances.

Short-Run Equilibrium

Occurs when quantity of real GDP demanded equals quantity of real GDP supplied, located at the intersection of AD and SAS curves.

Long-Run Equilibrium

Occurs when real GDP equals potential GDP, located at the intersection of AD, SAS, and LAS curves.

Sticky Wages

The phenomenon where money wages do not adjust quickly, affecting the economy's movement towards equilibrium.

Aggregate Expenditure (AE) Curve

A curve that shows the relationship between planned aggregate expenditure and real GDP, often used in the Keynesian model to determine equilibrium real GDP.

Aggregate Demand-Aggregate Supply (AD-AS) Model

A macroeconomic model that explains the determination of the equilibrium price level and real GDP by showing the interaction between the aggregate demand curve and the aggregate supply curves.

Relationship between Aggregate Expenditure (AE) and Aggregate Demand (AD)

Changes in autonomous aggregate expenditure (shifts in the AE curve) lead to shifts in the AD curve. An increase in planned aggregate expenditure at a given price level corresponds to a rightward shift in the AD curve.