Terms
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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
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Aggregate supply = Y = Ynatural + a(P -
Pexpected)
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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.
|
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Aggregate demand = Y = C(Y - T) + I(r) + G +
NX(e)
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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.
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