Business Fluctuations: Aggregate Demand and Supply

These flashcards cover key terms and concepts related to business fluctuations, aggregate demand and supply, and economic models.

Aggregate Demand Curve

Shows all the combinations of inflation and real growth consistent with a specified rate of spending growth.

Real Business Cycle (RBC) model

A model that explains business cycles and recessions primarily due to real shocks, assuming prices are fully flexible.

New Keynesian Model

A model explaining business cycles caused by real shocks and shocks to aggregate demand, assuming prices are sticky.

Recession

A significant, widespread decline in real income (real GDP) and employment.

Long-Run Aggregate Supply (LRAS)

A vertical line at the Solow growth rate, independent of the inflation rate.

Real Shock

Any shock that increases or decreases the potential growth rate.

Aggregate Demand (AD)

A schedule that shifts if the money growth rate changes or if the growth rate of velocity changes.

Short-Run Aggregate Supply (SRAS)

Shows the positive relationship between inflation rate and real growth in the short run when prices and wages are sticky.

Quantity Theory of Money

The idea that the money supply times the velocity of money equals nominal GDP.

Solow Growth Rate

An economy’s potential growth rate determined by increases in labor, capital stocks, and productivity.

Sticky Prices

Prices that do not adjust quickly to changes in economic conditions.

Inflation

The rate at which the general level of prices for goods and services is rising.

Velocity of Money

The average number of times a dollar is spent on final goods and services in a year.

Business Cycle

Fluctuations in the growth rate of real GDP around its trend growth rate.

Demand Shock

An unexpected event that increases or decreases demand for goods and services.

Supply Shock

An unexpected event that causes a sudden change in supply, impacting prices and growth.

Nominal Wage

The amount of money paid to workers before adjusting for inflation.

Menu Costs

The costs associated with changing prices, which can keep prices sticky.

AD/AS Framework

A model that illustrates the relationship between aggregate demand and aggregate supply in an economy.

Shocks to Aggregate Demand

Refers to unexpected changes in the demand for goods and services that can cause shifts in the AD curve.