Aggregate Demand and Supply Model

Flashcards covering important vocabulary and concepts related to the Aggregate Demand and Supply model in economics.

Aggregate Demand (AD)

Illustrates all combinations of real income (Y) and the average price level (P) at which equilibrium in the real and monetary sectors occurs.

Aggregate Supply (AS)

Represents the total output that producers are willing to supply at different price levels.

Short-Run Aggregate Supply (ASSR)

The short-run AS curve where prices of inputs do not adjust immediately to changes in demand.

Long-Run Aggregate Supply (ASLR)

The long-run AS curve reflecting the maximum output of an economy when resources are fully employed.

Cyclical Unemployment

Unemployment resulting from short-term economic fluctuations; it rises and falls with the business cycle.

Frictional Unemployment

Short-term unemployment that occurs while workers are in between jobs or searching for new ones.

Structural Unemployment

Long-term unemployment arising from a mismatch between workers' skills and job requirements.

Natural Rate of Unemployment

The long-term average rate of unemployment that is expected in a healthy economy.

Interest Rate Effect

The phenomenon where an increase in the price level leads to higher interest rates, which reduces investment and overall expenditure.

Wealth Effect

The reduction in consumption resulting from an increase in the price level which diminishes the real value of wealth.

Foreign Trade Effect

The impact on net exports when a domestic price increase reduces demand for exports and increases imports.

Medium-Run Supply Adjustment Process

The adjustments that occur in the supply side of the economy in response to demand changes over a medium time frame.

Dynamic Process of Adjustment

The gradual shift towards equilibrium in the economy as various parameters like price, income, and demand adjust over time.

Supply Shock

An event that suddenly changes the price of a commodity, resulting in sharp changes in the aggregate supply.

Adjustment Process

The mechanism through which the economy returns to equilibrium following a disturbance.

Drought Impact on Economy

A supply shock that results in decreased agricultural output leading to higher prices and reduced real income.

Stagflation

A condition of slow economic growth accompanied by inflation, typically resulting from supply shocks.

Inflationary Economy

An economic condition where prices are rising and the purchasing power of money is falling.

Aggregate Equilibrium

The point at which aggregate demand equals aggregate supply, stabilizing prices and output.

Government Expenditure (G)

Total spending by the government, which impacts aggregate demand and overall economic activity.

Repo Rate

The rate at which the central bank lends money to commercial banks, influencing loan rates and economic activity.

Investment (I)

Expenditure on capital goods that are used to produce goods and services.