econ ch 12

potential output

Potential output is the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

Short-run equilibrium aggregate output

Short-run equilibrium aggregate output is the quantity of aggregate output produced in the short-run macroeconomic equilibrium.

interest rate effect of change in aggregate price level

The interest rate effect of a change in the aggregate price level is the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' and firms' money holdings.

recessionary gap

when aggregate output is below potential output

demand shock

An event that shifts the aggregate demand curve

supply shock

An event that shifts the short-run aggregate supply curve

inflationary gap

aggregate output is above potential output

AD-AS model

In the AD-AS model, the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations.

aggregate demand curve

The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

aggregate supply curve

The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.

long-run macroeconomic equilibrium

The economy is in long-run macroeconomic equilibrium when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.

short-run macroeconomic equilibrium

The economy is in short-run macroeconomic equilibrium when the quantity of aggregate output supplied is equal to the quantity demanded.

self-correcting

The economy is self-correcting when shocks to aggregate demand affect aggregate output in the short run, but not the long run

long-run aggregate supply curve

The long-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.

short-run aggregate supply curve

The short-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.

Short-run equilibrium aggregate price level

The short-run equilibrium aggregate price level is the aggregate price level in the short-run macroeconomic equilibrium.

wealth effect of change in aggregate price level

The wealth effect of a change in the aggregate price level is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' assets.

nominal wage

dollar amount of wage paid

stagflation

the combination of inflation and falling aggregate output

stabilization policy

the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

sticky wages

Sticky wages are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

output gap

percentage difference between actual aggregate output and potential output