Aggregate Demand, Supply, Money & Banking Study Guide

This set of flashcards covers key concepts related to Aggregate Demand, Aggregate Supply, and Monetary Policy necessary for exam preparation.

Aggregate Demand (AD)

The relationship between the price level and real GDP demanded, representing total spending in the economy.

AD Formula

AD = C + I + G + NX, where C is consumption, I is investment, G is government spending, and NX is net exports.

Wealth Effect

Higher price levels lead to decreasing purchasing power, causing households to spend less.

Interest Rate Effect

Higher price levels increase demand for money, leading to higher interest rates which reduce investment.

International Trade Effect

Higher U.S. prices result in a decrease in exports and an increase in imports.

Movement along AD

Occurs due to changes in the price level, remaining on the same curve.

Shift of AD

Occurs due to changes in consumption (C), investment (I), government spending (G), or net exports (NX).

Long-Run Aggregate Supply (LRAS)

Vertical curve that represents output determined by labor, capital, and technology; price level does not affect output.

Short-Run Aggregate Supply (SRAS)

Upward sloping relationship between the price level and output supplied in the short run.

Sticky Wages

Concept that wages are fixed in the short run due to contracts, affecting SRAS.

Equilibrium (AD ∩ SRAS)

Short-run equilibrium occurs where aggregate demand intersects short-run aggregate supply.

What is Money?

Any asset accepted for goods/services and debt payments, with four main functions.

Functions of Money

Medium of exchange, unit of account, store of value, standard of deferred payment.

M1 Money Supply

Includes currency, checking accounts, and savings.

Fractional Reserve System

Banks keep a portion of deposits and lend the rest, creating money.

Federal Funds Rate (FFR)

The interest rate banks charge each other for overnight loans.

Expansionary Monetary Policy

Aims to lower the FFR to increase GDP and jobs.

Contractionary Monetary Policy

Aims to raise the FFR to reduce inflation.

Quantitative Easing (QE)

Fed buys long-term bonds to lower long-term interest rates.

Transmission Mechanism

The process by which changes in the Federal Funds Rate affect overall spending and investment.

Arbitrage

The practice of taking advantage of price differences in different markets.

Policy Implementation Chain

Step-by-step process starting from Fed setting FFR to changes in GDP and inflation.