Aggregate Supply
Terms and Formulae
Terms
Adverse Supply Shocks
-
Economic changes that suddenly and drastically
increase the cost of inputs and thus shift the
aggregate supply curve to the left.
Aggregate Demand
-
The total demand for goods and services in an
economy.
Aggregate Supply
-
The total supply of goods and services in an
economy.
AS-AD Model
-
The model of aggregate supply and aggregate
demand that is used to evaluate the effects of
economic policy decisions.
Capital
-
Physical machines and human experience that lead to
productivity.
Capital Stock
-
The total amount of capital, both physical and
human, that exists in an economy.
Contractionary Policy
-
Monetary and fiscal policy that shifts the
aggregate demand curve to the left.
Expansionary Policy
-
Monetary and fiscal policy that shifts the
aggregate demand curve to the right.
Expected Price Level
-
The level of prices that firms believe will
exist at the time that contracts are made.
Factors of Production
-
Refers to capital and labor, as these are
the inputs that lead to productivity.
Investment
-
Money spent on the improvement of the capital
stock.
Labor
-
Physical effort supplied by workers producing
output.
Labor Force
-
The total number of people working at the production
of output.
Labor Market
-
The market for workers where the demand for
labor and the supply for labor are
equilibrated by the wage.
Menu Costs
-
The financial costs to firms of having to reprint
menus, catalogues, and other price-listing materials
in response to economic changes.
Natural Rate of Output
-
The rate of output when the factors of
production, capital and labor, are used at
their normal rates.
Nominal Wage
-
The amount of money paid to a worker in terms of
actual currency, not purchasing power.
Output
-
Goods and services produced by workers and firms.
Positive Supply Shocks
-
Economic changes that suddenly and drastically
decrease the cost of inputs and thus shift the
aggregate supply curve to the right.
Price Level
-
The overall cost of goods and services in an
economy.
Real Wage
-
The amount of money paid to a worker in terms of
purchasing power, not actual currency.
Stagflation
-
A condition where the price level increases and
output decreases. This usually results from an
adverse supply shock.
Supply Shock
-
An economic change that suddenly and drastically
affects the cost of inputs and thus shifts the
aggregate supply curve. C.f. adverse supply
shocks and positive supply shocks.
Formulae
| Aggregate supply = Y = Ynatural + a(P - Pexpected) | In this formula Y is output, Ynatural is the natural rate of output that exists when all productive factors are used at their normal rates, a is a constant greater than zero, P is the price level, and Pexpected is the expected price level. |
| Aggregate demand = Y = C(Y - T) + I(r) + G + NX(e) | In this formula, Y is output, C(Y - T) is consumption as a function of disposable income, I(r) is investment as a function of the real interest rate, G is government spending, and NX(e) is net exports as a function of the real exchange rate. |
