12.1 Aggregate Demand

• Aggregate demand: total demand for goods and services

• Inverse relationship between price and GDP

  • Caused by:

    • The Real Wealth Effect

    • The Foreign Trade Effect

    • The Interest Rate Effect

12.2 Short-run and Long-run Aggregate Supply

• Aggregate supply (AS): curve shows total value of output produces are willing + able to supply at different price levels during a certain time

• Aggregate demand (AD): total demand of goods/services

• Price level: average level for all prices

• Long-run aggregate supply curve (LAS): stands at level of output that corresponds with full employment

12.3 Equilibrium and Changes in the Aggregate Demand-Aggregate Supply Model

• Cost-push (supply inflation): when inflation is due to increase in resource costs (shifts AS curve to left)

• Stagflation: rising prices and falling output

• Demand pull inflation: result of AD curve shifting out to the right relative to AS curve

• Creeping inflation: inflation at a low rate that remains teady for a long period of time

• Galloping inflation: unsteady inflation that exceeds 10% per year and grows monthly

• Hyperinflation: rapid price incrase greater than 50% per year

• Inflationary gap: amount the equilibrium real GDP would need to increase to reach the LAS

• Spending multiplier: number the initial amount of new spending needs to be multiplied by to find total resulting increase in real GDP

• Marginal propensity to consume (MPC): amount consumption increases for every dollar of real income

• Marginal propensity to save (MPS): fraction of each dollar of income that is saved
  

• Spending multiplier (expenditure multiplier)

12.4 Fiscal Policy

• Fiscal policy: when government tries to counteract fluctuations in aggregate expenditure by changing purchases, transfer payment, taxes