Macroeconomics Chapter 11: The Determination of Aggregate Output, the Price Level, and the Interest Rate

Aggregate Supply (AS)

The total supply of all goods and services in an economy.

The AS curve shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.

The AS curve is *not* the sum of individual supply curves.

Increase in (Costs) will shift the AS curve left.

Short Run Aggregate Supply Curve

Sloped Upward, not vertical. AS curves are flatter at lower levels of output, yet increase as output rises.

Long Run Aggregate Supply Curve

Vertical. AS curves are vertical at capacity.

The long run AS curve is vertical if wages adjust completely to prices in the long run.

Cost Shock or Supply Shock

A change in costs that shifts the short-run aggregate supply (AS) curve.

Aggregate Demand (AD)

The negative relationship between price (p) and output (y).

Increase in (G) shifts the AD right.
Increase in (Z Fed Equation) shifts the AD left.

IV Graphs Short Hand

r (increase) results in I (decrease) results in AE (decrease) results in Y (decrease).

r (decrease) results in I (increase) results in AE (increase) results in Y (increase).

IS Curve

Relationship between aggregate output and the interest rate in the goods market.

Fed Rule

Equation that shows how the Fed's interest rate decision depends on the state of the economy.

r = aY + bP + yZ

Increase in (G) shifts IS right.

Increase in (Price) shifts Fed Rule Left

Increase in (Z Fed Equation) shifts Fed Rule Left. Z could be consumer confidence for example, so the fed would increase the interest rate.

Real Wealth Effect

The change in consumption brought about by a change in real wealth that results from a change in the price level.

Potential Output, or Potential GDP

The level of aggregate output that can be sustained in the long run without inflation.