Aggregate Demand and Supply Concepts

Flashcards covering key vocabulary and concepts related to Aggregate Demand and Supply, intended for exam preparation.

Aggregate

Added all together.

Aggregate Demand

All goods and services (REAL GDP) that buyers are willing and able to purchase at different price levels.

Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy.

Inverse Relationship

As one variable increases, the other decreases; this applies to price level and real GDP.

Aggregate Demand Curve

Graph depicting demand (AD) by consumers, businesses, government, and foreign countries.

Wealth Effect

Higher price levels reduce the purchasing power of money, decreasing the quantity of expenditures.

Interest Rate Effect

As price levels increase, lenders charge higher interest rates to maintain real returns.

Foreign Trade Effect

When U.S. price levels rise, foreign buyers purchase fewer U.S. goods, and Americans buy more foreign goods.

Consumer Spending

Includes increases in disposable income, consumer expectations, household indebtedness, and taxes.

Investment Spending

Influenced by real interest rates, future business expectations, and technology productivity.

Multiplier Effect

Describes how an initial change in spending leads to a larger overall change in real GDP.

MPC (Marginal Propensity to Consume)

The fraction of additional income that is consumed rather than saved.

MPS (Marginal Propensity to Save)

The fraction of additional income that is saved rather than consumed.

Spending Multiplier

Calculated as 1 / MPS or 1 / (1 - MPC).

Aggregate Supply

The total amount of goods and services (REAL GDP) that firms produce in an economy at different price levels.

Short Run Aggregate Supply

Wages and resource prices are sticky and do not change as price levels change.

Long Run Aggregate Supply

Wages and resource prices are flexible and adjust to changes in price levels.

Sticky Wages

Reluctance to lower or raise established wages or prices.

Government Action

Includes subsidies, taxes, and regulations that affect aggregate supply.