aggregate demand(AD) and aggregate supply(AS) model |
short-run changes in real GDP and price level. |
The aggregate demand curve |
the price level and the level of planned aggregate expenditures by households, firms, and the government. |
The short-run aggregate supply curve shows the relationship in.. |
the short run between the price level and the quantity of real GDP supplied by firms. |
The long-run |
the long run between the price level and the quantity of real GDP supplied. |
The four components of aggregate demand are.. |
consumption (C), investment (I), government purchases (G), and net exports (NX). |
AD curve is downward sloping |
a decline in the price level causes consumption, investment, and net exports to increase. |
If the |
The demand curve will stay constant and the economy will move up or down it |
The variables that cause the aggregate demand curve to shift are divided into three |
changes in government policies, changes in the expectations of households and firms, and changes in foreign variables. |
monetary policy involves |
the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives. |
When |
Interest rates |
Fiscal policy |
involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives |
Changes in federal taxes and |
shift |
long-run aggregate supply curve is a |
vertical line because in the long run, real GDP is always at its potential level and is unaffected by the price level. |
The |
workers and firms fail to accurately predict the future price level. |
The three main explanations of why this failure results in an upward-sloping aggregate |
(1) contracts make wages and prices "sticky," (2) businesses often adjust wages slowly, and (3) menu costs make some prices sticky |
Menu costs are |
the costs to firms of changing prices on menus or catalogs |
If the price level changes but all else remains constant, then |
the economy will move up or down a stationary aggregate supply curve. |
If any variable other than the price level changes, then |
the aggregate supply curve will shift. |
The aggregate supply curve shifts as a result of |
increases in the labor force and capital stock, technological change, expected changes in the future price, adjustments of workers and firms to errors in past expectations about the price level, and unexpected changes in the price of an important raw material. |
supply shock |
is an unexpected event that causes the short-run aggregate supply curve to shift. |
In long-run macroeconomic equilibrium, the aggregate |
intersect at a point on the long-run aggregate supply curve |
In short-run macroeconomic equilibrium, the aggregate demand and short-run aggregate supply curves do what? |
intersect at a point off the long-run aggregate supply curve. |
An automatic mechanism drives the |
long-run equilibrium. |
If short-run equilibrium occurs at a point below potential real GDP then what would we do to bring it back? |
drop wages and prices and the SRAS shifts to the right until potential GDP is restored. |
If short-run equilibrium occurs at a point beyond potential real GDP, then |
wages and prices will rise, and the short-run aggregate supply curve will shift to the left until potential GDP is restored. |
Stagflation |
is a combination of inflation and recession, usually resulting from a supply shock. |
To make the aggregate demand and aggregate supply model more realistic, we need to make it dynamic |
(1) Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right; (2) during most years, aggregate demand shifts to the right; and (3) except during periods when workers and firms expect high rates of inflation, the aggregate supply curve shifts to the right. |
The dynamic aggregate demand and aggregate |
macroeconomic conditions, including the beginning of the 2007-2009 recession. |