Chapter 8. The Aggregate Demand/Aggregate Supply Model
KEY TERMS
- aggregate demand (AD)
- the amount of total spending on domestic goods and services in an economy
- aggregate demand (AD) curve
- the total spending on domestic goods and services at each price level
- aggregate demand/aggregate supply model
- a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
- aggregate supply (AS)
- the total quantity of output (i.e. real GDP) firms will produce and sell
- aggregate supply (AS) curve
- the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level
- full-employment GDP
- another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment
- intermediate zone
- portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone
- Keynes’ law
- “demand creates its own supply”
- Keynesian zone
- portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat
- long run aggregate supply (LRAS) curve
- vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run
- neoclassical economists
- economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run
- neoclassical zone
- portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep
- potential GDP
- the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions
- Say’s law
- “supply creates its own demand”
- short run aggregate supply (SRAS) curve
- positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed
- stagflation
- an economy experiences stagnant growth and high inflation at the same time