Chapter 9: Aggregate Demand and Aggregate Supply keywords

Long-run aggregate supply curve

A curve showing the relationship between real GDP produced and the price level when wages (and other resource prices) change to reflect changes in the price level, ceteris paribus. The LRAS curve is vertical at the full employment level of GDP, or potential GDP, indicating that in the long run the economy produces potential GDP, which is independent of the price level.

Short-run aggregate supply curve

A curve showing the relationship between the price level and the quantity of real GDP produced by firms when resource prices do not change.

Business confidence

A measure of the degree of optimism among firms in an economy about the future performance of firms and the economy; it is measured on the basis of surveys of business managers. Is an important determinant of the investment component of aggregate demand.

Consumer confidence

A measure of the degree of optimism of consumer about their future income and the future of the economy; it is measured on the basis of surveys consumers. Is an important determinant of the consumption component of aggregate demand.

Inflationary gap

A situation where real GDP is greater than potential GDP, and unemployment is lower than the natural rate of unemployment it arises when the AD curve intersects the SRAS curve at a higher level of real GDP than potential GDP.

Recessionary gap

A situation where real GDP is less than potential GDP, and unemployment tis greater than the natural rate of unemployment; it arises when the AD curve intersects the SRAS curve at a lower level of real GDP than potential GDP. Also known as 'deflationary gap'.

Keynesian aggregate supply curve

An aggregate supply curve that has a flat (horizontal) section, and upward sloping section and a vertical section.

Monetarist/New classical model

Actually includes two different models of the macroeconomy (the monetarist and the new classical); both are based on the following principles: the importance of the price mechanism in coordinating economic activities, the concept of competitive market equilibrium, and thinking about the economy as a harmonious system that automatically tends toward full employment.

Determinants of aggregate demand

Factors that cause shifts of the aggregate demand curve; include factors that influence consumption spending (C), investment spending (I), government spending (G) and net exports (Xn).

Long-run

In macroeconomics, it is the period of time when prices of resources (especially wages) change along with changes in the price level.

Short-run

In microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm. In macroeconomics, it is the period of time during which the prices of resources particularly the price of labour (wages) do not change.

Interest rate

Interest expressed as a percentage in the case of borrowed obey, it is interest as a percentage of the amount borrowed. Changes in interest rates form the basis of monetary policy.

Spare capacity

Refers to physical capital that firms have available but do not use; arises in a recession when there is unemployment of resources.

Indebtedness

Refers to the level of debt, or the amount of money owed to creditors (lenders); may be on a household, firm, or country level.

Equilibrium level of real GDP

Same as equilibrium level of output

Personal income taxes

Taxes paid by households or individuals in households on all forms of income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company); is the most important source of government tax revenues in many countries (especially economically more developed countries).

Aggregate demand curve

The curve that shows the relationship between total quantity of goods and services that all buyers in an economy want to buy over a particular time period (aggregate demand), measured on the horizontal axis, plotted against the price level, measured on the vertical axis.

Corporate indebtedness

The degree to which corporations have debts.

Household indebtedness

The degree to which households have debts.

Disposable income

The income of consumers that is left over after the payment of income taxes.

Full employment level of output

The level of output (or real GDP) at which unemployment is equal to the natural rate of unemployment; the level of output (real GDP) where there is no deflationary or recessionary gap. Also known as potential output.

Equilibrium level of output

The level of output (real GDP) where the aggregate demand curve intersects the aggregate supply curve (also known as the 'equilibrium level of income'). Note the distinction between short-run equilibrium level of output and long-term equilibrium level of output.

Aggregate supply

The total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus.

Aggregate demand

The total quantity of goods and services that all buyers in an economy (consumers, firms, the government and foreigners) want to buy over a particular time period, at different possible price levels, ceteris paribus.