Economics Ch. 29

Deflation

A decline in the price level.

Productivity

A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work. It is a measure of average real output, or real output per unit of ouput.

Aggregate Supply

A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels. This relationship varies depending on time horizons & how quickly output prices and input prices can change. 3 time horizons: 1) Immediate short run- both input prices as well as output prices are fixed. 2) Short run- input prices are fixed, but output prices can vary. 3) Long run- input prices as well as output prices can vary

Aggregate Demand

A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels. A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each price level. These buyers include the nation's households, businesses, and government along with consumers located abroad. The downsloping aggregate demand curve AD indicates an inverse (or negative) relationship between the price level and the amount of real output purchased. It is downsloping because of 3 effects of a price-level change: 1) Real-balances effect, (2) Interest-Rate Effect, (3) Foreign Purchases Effect

Efficiency Wages

A wage that minimizes wage cost per unit of output by encouraging greater effort or reducing turnover.

Immediate-Short-Run Aggregate Supply Curve

An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curves shifts; a horizontal aggregate supply curve that implies an inflexible price level.

Short-Run Aggregate Supply Curve

An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level. The upsloping aggregate supply curve AS indicates a direct (or positive) relationship between the price level and the amount of real output that firms will offer for sale. The AS curve is relatively flat below the full-employment output because unemployed resources and unused capacity allow firms to respond to price-level rises with large increases in real output. It is relatively steep beyond the full-employment output because resource shortages and capacity limitations make it difficult to expand real output as the price level rises.

Determinants of Aggregate Demand (Aggregate Demand Shifters)

Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve. A change in one or more of the listed determinants of aggregate demand will shift the aggregate demand curve. The rightward shift represents an increase in aggregate demand; the leftward shift shows a decrease in aggregate demand. The vertical distances between AD1 and the dashed lines represent the initial changes in spending (Figure 29.2). Through the multiplier effect, that spending produces the full shifts of the curves.

Determinants of Aggregate Supply (Aggregate Supply Shifters)

Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.

Real-Balances Effect

Produced by a change in the price level. The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.

Long-Run Aggregate Supply Curve

The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level. The long-run aggregate supply curve ASLR is vertical at the full-employment level of real GDP (Qf) because in the long run wages and other input prices rise and fall to match changes in the price level. So price-level changes do not affect firms' profits and thus they create no incentive for firms to alter their output.

Equilibrium Real Output

The gross domestic product at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.

Foreign Purchases Effect

The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.

Aggregate Demand-Aggregate Supply Model (AD-AS Model)

The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output. It is a "variable price-variable output" model that allows both the price level and level of real GDP to change.

Equilibrium Price Level

The price level at which the aggregate demand curve intersects the aggregate supply curve.

Menu Costs

The reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants. Additional costs derive from: (1) estimating the magnitude and duration of the shift in demand to determine whether prices should be lowered, (2) repricing items held in inventory, (3) printing and mailing new catalogs, and (4) communicating new prices to customers, perhaps through advertising.

Interest-Rate Effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).