Aggregate Supply and Aggregate Demand

These flashcards cover key concepts related to aggregate supply and demand, macroeconomic equilibrium, and major economic schools of thought.

Aggregate Supply

The relationship between the quantity of real GDP supplied and the price level.

Long-Run Aggregate Supply (LAS)

The relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP; the LAS curve is vertical at potential GDP.

Short-Run Aggregate Supply (SAS)

The relationship between the quantity of real GDP supplied and the price level when the money wage rate and other resource prices are constant; the SAS curve is upward sloping.

Potential GDP

The highest level of real GDP that an economy can sustain over the long term without increasing inflation.

Real GDP

The total quantity of final goods and services produced in the economy, adjusted for inflation.

Aggregate Demand (AD)

The relationship between the quantity of real GDP demanded and the price level.

Wealth Effect

A phenomenon where a rise in the price level decreases real wealth, leading to decreased consumption and lower quantity of real GDP demanded.

Substitution Effect

The effect where a rise in the price level raises interest rates, causing people to borrow and spend less, reducing the quantity of real GDP demanded.

Economic Equilibrium

The point where the quantity of real GDP demanded equals the quantity of real GDP supplied.

Inflationary Gap

A situation where real GDP exceeds potential GDP, typically associated with higher price levels.

Recessionary Gap

A situation where potential GDP exceeds real GDP, indicating underutilized economic resources.

Fiscal Policy

Government policy regarding taxation and spending to influence the economy.

Monetary Policy

The process by which a central bank, such as the Federal Reserve, controls the money supply and interest rates.

Classical Economics

The theory that markets function best without government intervention; economies are self-regulating.

Keynesian Economics

The theory that active government intervention is necessary to manage economic cycles and achieve full employment.

Monetarism

The theory that variations in the money supply have major influences on national output in the short run and the price level over longer periods.