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

These flashcards cover key concepts related to aggregate output, the price level, and the interest rate in macroeconomics, as discussed in Chapter 11.

Aggregate Supply (AS) Curve

The graph showing the relationship between the total quantity of output supplied and the overall price level.

Short-Run AS Curve

The portion of the AS curve that slopes upward due to price stickiness and capacity constraints.

Price/Output Response Curve

Another term for the AS curve, signifying how output and price decisions interact in the economy.

Downward Sloping AD Curve

The AD curve's downward slope indicates that as the price level rises, aggregate output demanded decreases.

Aggregate Demand (AD) Curve

A curve that shows the total quantity of goods and services demanded across all levels of the economy at various price levels.

Planned Aggregate Expenditure (AE)

The total amount that households, businesses, and the government plan to spend in an economy, typically described by AE = C + I + G.

Interest Rate's Effect on Investment

An inverse relationship where higher interest rates reduce planned investment and lower interest rates increase it.

Capacity Utilization

A measurement of how much of an organization's capacity is being used; low utilization suggests more potential output is possible.

Sticky Prices

Prices that do not adjust immediately to changes in supply or demand, often including wages.

Cyclical Unemployment

Unemployment caused by a decline in economic activity, leading to insufficient demand for labor.

Potential GDP

The maximum level of output an economy can sustain without triggering inflation.

Cost Shocks

Unexpected changes in the cost of production that can lead to shifts in the AS curve.

FDI (Foreign Direct Investment)

Investment made by a company or individual in one country in business interests in another country.

Monetary Policy

The process by which a central bank manages the money supply and interest rates to influence economic activity.

Fiscal Policy

Government policies regarding taxation and spending to influence economic conditions.

IS Curve

A curve that represents the relationship between interest rates and the level of income that results in equilibrium in the goods market.

Equilibrium Price Level

The price level at which the quantity of aggregate demand equals the quantity of aggregate supply.

Short-Run Aggregate Supply Shifts

Changes in the AS curve that occur due to factors like technological advancements or changes in production costs.

Inflationary Pressures

Economic conditions that increase the rate of inflation, often resulting from high demand or increasing production costs.

The Fed

The Federal Reserve, the central bank of the United States, which regulates the money supply and interest rates.

FOMC (Federal Open Market Committee)

The branch of the Federal Reserve that determines the direction of monetary policy.

Real Wealth Effect

The effect that changes in the price level have on the consumption of wealth, affecting consumption spending.

Aggregate Expenditure

The total spending on the nation’s goods and services at a given price level.

Interest Rate Targeting

The strategy used by the Fed to influence economic activity by adjusting interest rates.

Labor Force Participation

The percentage of the working-age population that is either employed or actively seeking employment.

Supply Shock

An unexpected event that causes a sudden increase or decrease in supply, affecting prices.

Long-Run AS Curve

Typically vertical, represents the relationship between price level and quantity of output when all costs have fully adjusted.

Expansionary Fiscal Policy

A form of fiscal policy aimed at increasing output and decreasing unemployment, typically involving increased government spending.

Crowding Out Effect

A situation where increased government spending leads to reduced private sector spending.

Capacity Constraints

Limits on the amount of output that can be produced given current resources and technologies.

Equilibrium Output

The level of output where planned spending equals actual output.

Negative Cost Shock

An increase in production costs leading to a shift of the AS curve to the left.

Positive Cost Shock

A decrease in production costs leading to a shift of the AS curve to the right.

Interest Sensitive Sectors

Industries most affected by changes in interest rates, such as housing and automobiles.

Budget Deficits

When government expenditures surpass revenue, requiring borrowing or other financial measures.

Printing Money

A colloquial term for central banks increasing the money supply, often viewed in the context of financing deficits.

Monetizing the Deficit

The process whereby a government covers its budget deficit by creating money.

Public Bonds

Debt securities issued by governments to finance expenditure, which must be repaid with interest.

Z Factors

Exogenous factors that influence the Fed's interest rate decisions.

Price Level Adjustments

Changes in the average level of prices in an economy, often affected by monetary policy.

Inflation Rate

The percentage increase in the price level from one period to another.