EC Module 4

Vocabulary flashcards covering the key concepts, markets, curves, equilibria, and adjustment processes of the Aggregate Demand–Aggregate Supply (AD-AS) model.

Goods and Services Market

A key macroeconomic market where businesses supply goods and services in exchange for sales revenue, while households, investors, governments, and foreigners (net exports) demand goods.

Resource Market

A highly aggregated market where business firms demand resources, and households supply labor and other productive resources in exchange for income.

Loanable Funds Market

A market that coordinates the actions of borrowers and lenders, bringing net household saving and net inflows of foreign capital into balance with borrowing by businesses and governments.

Foreign Exchange Market

A market that coordinates the actions of domestic residents who demand foreign currency to purchase items abroad with foreigners who supply foreign currencies in exchange for domestic currency.

Circular Flow Diagram

A model illustrating how four key markets (resource market, goods and services market, foreign exchange market, and loanable funds market) coordinate income and spending flows across businesses, households, government, and foreign sectors.

Aggregate Demand (AD) Curve

A curve indicating the various quantities of domestically produced goods and services that purchasers are willing to buy at different price levels, sloping downward to the right.

Short-Run (in Aggregate Supply)

A time period during which some prices, particularly in resource markets, are fixed by prior contracts and long-term commitments, preventing immediate price adjustments when unexpected conditions arise.

Long-Run (in Aggregate Supply)

A time period of sufficient length for decision makers to fully adjust their behavior, contracts, and long-term commitments in response to price changes.

Short-Run Aggregate Supply (SRAS) Curve

An upward-sloping curve indicating the quantities of goods and services domestic firms supply in response to price level changes when production costs are temporarily fixed by prior commitments.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve representing the output rate after full price adjustment, determined by the economy's resource base, technology, and institutional structure at full employment ($Y_F$).

Short-Run Equilibrium in Goods and Services Market

The state where aggregate quantity demanded equals aggregate quantity supplied at a price level ($P$), represented graphically by the intersection of the $AD$ and $SRAS$ curves.

Long-Run Equilibrium in Goods and Services Market

The state where decision makers correctly anticipated the current price level, output equals potential GDP ($Y_F$), full employment is present, and the $AD$, $SRAS$, and $LRAS$ curves intersect.

Potential GDP ($Y_F$)

The economy's maximum sustainable rate of output consistent with its resource base, current technology, and institutional structure at full employment.

Consumer Sentiment Index

An index measuring consumer optimism and pessimism regarding future economic conditions, where shifts toward optimism increase aggregate demand and shifts toward pessimism decrease aggregate demand.

Anticipated Changes

Economic developments that are fully expected by decision makers, allowing them time to adjust prior commitments without disrupting macroeconomic equilibrium.

Unanticipated Changes

Unexpected economic developments that catch market participants by surprise, causing output to temporarily deviate from long-run full employment potential.

Supply Shock

An unexpected event, such as weather variations or major resource price shifts, that temporarily or permanently alters aggregate supply.

Recession (in AD-AS Model)

A period when product market prices are low relative to production costs and resource prices, caused by unanticipated reductions in $AD$ or unfavorable supply shocks.

Unsustainable Boom

A period when product market prices are high relative to resource prices and production costs, caused by unanticipated increases in $AD$ or favorable supply shocks.

Macro-Adjustment via Real Resource Prices

An automatic self-correcting force where weak demand during a recession lowers real resource prices to increase $SRAS$, and strong demand during a boom raises real resource prices to reduce $SRAS$.

Macro-Adjustment via Real Interest Rates

An automatic self-correcting force where weak investment demand during a recession lowers real interest rates to stimulate $AD$, and strong investment demand during a boom raises real interest rates to retard $AD$.