Econ 320 - Midterm II Review: Aggregate Demand, Supply, and Monetary Policy

This set of flashcards covers key terms and concepts related to Aggregate Demand, Aggregate Supply, monetary policy, and their implications in economics as reviewed in the lecture notes.

Aggregate Demand (AD)

The total demand for goods and services in an economy at a given overall price level and during a specified time period.

Pigou's effect

A phenomenon suggesting an increase in wealth leads to increased consumption, which contributes to aggregate demand.

Marginal Propensity to Consume (MPC)

The proportion of any additional income that a household will spend on consumption rather than saving.

Spending Multiplier

The ratio of a change in national income to the initial change in spending that caused it; indicates the total impact on GDP from a change in spending.

Short-Run Aggregate Supply (SRAS)

The total production of goods and services available in an economy during a specific time period, where some prices may be sticky.

Long-Run Aggregate Supply (LRAS)

The total output of an economy when both labor and capital are fully employed, representing potential GDP.

Business Cycle

Fluctuations in economic activity characterized by periods of economic expansion and contraction.

Adverse Selection

A situation in which one party in a transaction has more or better information than the other party, leading to imbalanced outcomes.

Liquidity

The ease with which an asset can be converted into cash without affecting its market price.

Credit Crunch

A sudden reduction in the general availability of loans or credit; often tied to increased risk aversion amongst lenders.

Federal Reserve (Fed)

The central banking system of the United States, which regulates the U.S. monetary and financial system.

Expansionary Monetary Policy

A policy intended to stimulate economic growth by increasing the money supply, typically through lower interest rates.

Contractionary Monetary Policy

A policy designed to reduce the money supply and curb inflation by increasing interest rates.

Fisher Equation

An equation stating that the nominal interest rate is equal to the real interest rate plus the expected inflation rate.

Zero Lower Bound (ZLB)

A situation in which the central bank's nominal interest rate is at or near zero, limiting the bank's ability to stimulate the economy.

Moral Hazard

A condition where one party engages in risky behavior knowing that it is protected against the risk because another party will incur the cost.