Aggregate Demand & Aggregate Supply

Flashcards on Aggregate Demand and Aggregate Supply

Aggregate Demand (AD)

The total demand for all goods and services in an economy at a given price level.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell at a given price level.

Wealth Effect

As prices rise, the purchasing power of wealth falls, leading to reduced consumption.

Export Price Effect

As domestic prices rise, exports become more expensive, causing a decrease in exports.

Interest Rate Effect

As prices rise, people hold more money, pushing interest rates higher, which reduces business investment.

Determinants of Aggregate Demand

Factors that shift the entire AD curve when they change (e.g., changes in consumer spending, investment, government spending, and net exports).

Short-Run Aggregate Supply (SRAS)

The relationship between the aggregate price level and the quantity of aggregate output supplied in the short run.

Sticky Input Costs

Input costs, like wages, that are slow to change in response to changes in the overall price level; a reason why SRAS is positively sloped.

Nominal Wages

Wages that are not adjusted for inflation or deflation.

Stagflation

A combination of inflation and falling aggregate output, typically resulting from a negative supply shock.

Long-Run Aggregate Supply (LRAS)

The relationship between the aggregate price level and the quantity of aggregate output supplied in the long run when all prices, including nominal wages, have adjusted; represented by a vertical curve.

Full Employment

The level of employment that occurs when the economy is operating at its potential output; corresponds to the natural rate of unemployment.

Stabilization Policy

The use of government policy to reduce the severity of recessions and control excessively strong expansions.

Demand Shock

An event that shifts the aggregate demand curve.

Supply Shock

An event that shifts the aggregate supply curve.

Demand-Pull Inflation

Inflation caused by a positive demand shock that expands the economy beyond full employment output.

Cost-Push Inflation

Inflation caused by a negative supply shock that reduces output and raises prices.