Aggregate Demand and Aggregate Supply

Flashcards covering the fundamentals of economic fluctuations, the aggregate demand and supply model, and historical economic events.

Recessions

Periods of economic contraction characterized by falling real incomes and rising unemployment.

Depressions

Severe and prolonged recessions.

Classical Dichotomy

The theoretical separation of real variables and nominal variables, which holds in the long run according to classical theory.

Monetary Neutrality

The classical idea that changes in the money supply do not affect real variables, such as growth or saving, in the long run.

The Wealth Effect (C)

One reason the aggregate-demand curve slopes downward: a lower price level increases the real value of money held by households, making them feel wealthier and stimulating consumer spending.

The Interest-Rate Effect (I)

One reason the aggregate-demand curve slopes downward: a lower price level reduces money demand, causing interest rates to fall, which encourages investment in housing and equipment.

The Exchange-Rate Effect (NX)

One reason the aggregate-demand curve slopes downward: lower U.S. interest rates lead to a depreciation of the U.S. dollar, which stimulates net exports.

Natural Level of Output

Also called potential output; the level of production of goods and services an economy reaches in the long run when its labor, capital, and resources are fully utilized.

Short-Run Aggregate-Supply (SRAS) Equation

$Y = \bar{Y} + a(P - P^e)$, stating that output deviates from its natural level when the actual price level deviates from the expected price level.

Sticky-Wage Theory

The theory that a lower-than-expected price level for given nominal wages causes firms to hire fewer workers and cut production because real wages have risen.

Sticky-Price Theory

The theory that some prices are slow to adjust due to menu costs; a lower-than-expected price level leaves these firms with prices that are too high, reducing sales and production.

Menu Costs

The costs associated with adjusting prices that can lead to sticky prices in the short run.

Misperceptions Theory

The theory that suppliers may confuse changes in the overall price level with changes in the relative prices of their specific products, causing them to adjust output incorrectly.

Stagflation

A period of simultaneous stagnation (falling output) and inflation (rising prices), often caused by an adverse supply shock.

Supply Shock

An event that increases firms' production costs, such as a sudden rise in oil prices, shifting the SRAS curve to the left.

The Great Depression (1929–1933)

A period where real GDP fell by $27\%$ and unemployment rose to $25\%$, primarily caused by a massive leftward shift in aggregate demand.

The Great Recession (2008–2009)

A deep contraction in AD sparked by a housing bubble burst, mortgage defaults, and credit freezes.

The Covid Recession of 2020

The shortest recession in history, unique for featuring both a supply shock (lockdowns) and a demand shock (consumers staying home) simultaneously.

CARES Act

A 2020 fiscal policy response providing about $2\text{ trillion}$ in stimulus, roughly $10\%$ of GDP, to prevent economic scarring.