ECO 1002: Introduction to Macroeconomics - The Aggregate Demand / Aggregate Supply Model

This set of flashcards covers key concepts, definitions, and important principles discussed in the lecture on the Aggregate Demand and Aggregate Supply Model in macroeconomics.

The Aggregate Demand (AD) Curve represents __ on domestic goods and services at each price level.

The total spending on domestic goods and services in an economy.

The formula for Aggregate Demand is __.

AD = C + I + G + (X − M)

In the long run, the economy adjusts to potential GDP and full employment through __.

Full market flexibility.

In the short run, which market factors can be fixed leading to supply inelasticities? __, __, __.

Wages, prices, economic frictions (e.g., contracts & leases).

A country’s net export position (X - M) depends on aggregate prices and __.

Several external forces such as household/firms preferences, exchange rates, and global economic conditions.

The __ effect states that as the price level falls, the purchasing power of people’s income increases, inducing them to spend more.

Wealth effect

An increase in government spending will likely shift the AD curve __.

Rightward.

Short-Run Aggregate Supply (SRAS) is generally considered to be __ sloping in relation to price levels.

Upward.

According to the Keynesian school of thought, __ creates its own supply.

Demand.

Say's Law suggests that __ creates its own demand, typically applying in the long run.

Supply.

Potential GDP, as indicated by the Long-Run Aggregate Supply (LRAS), is determined by and .

The total amount of physical capital (K) and the full employment level of labor (L).

The demand side of the economy, illustrated by the AD curve, can shift due to changes in __.

Preferences, expectations, or government policies.

During a negative supply shock, the __ may increase as output falls, raising prices.

Price level.

The Complete AS-AD Model predicts economic responses by identifying changes in __, __, and __ shocks.

AD, SRAS, and LRAS.