Aggregate Demand and Supply Concepts

The relationship between the overall price level and the quantity of real GDP demanded.

The AD curve slopes downward because as the price level rises, the quantity of real GDP demanded falls.

The AD curve shifts to the right when there is an increase in the quantity of real GDP demanded at every price level.

The AD curve shifts to the left when there is a decrease in the quantity of real GDP demanded at every price level.

The curve showing the relationship between the overall price level and the quantity of real GDP supplied.

The AS curve is divided into three ranges: the Keynesian Range, the Intermediate Range, and the Classical Range.

The AS curve shifts to the right when there is an increase in the quantity of real GDP supplied at every price level.

The AS curve shifts to the left when there is a decrease in the quantity of real GDP supplied at every price level.

The relationship between the price level and the quantity of real GDP demanded, showing an inverse relationship: as the price level increases, the quantity of real GDP demanded decreases.

The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value.

The impact on total spending (and therefore real GDP) caused by the direct relationship between the price level and the interest rate.

The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the net exports of an economy.

The quantity of goods and services each dollar buys.

The change in total spending caused by the inverse relationship between the price level and the quantity of real GDP demanded.

A shift of the entire aggregate demand curve to the right or left.

The total demand for all goods and services produced within an economy at a given price level.

Conditions that lower production costs, resulting in an increase in the quantity of goods and services supplied at every price level.

Conditions that increase production costs, resulting in a decrease in the quantity of goods and services supplied at every price level.

An increase in the general price level caused by an increase in the cost of production, resulting in a leftward shift of the aggregate supply curve.

An increase in the general price level caused by an increase in aggregate demand, resulting in a movement along the aggregate supply curve.

A situation where an economy experiences both high unemployment and rapid inflation.

A rise in the general price level caused by an increase in total spending (demand), resulting from a rightward shift in the aggregate demand curve.

A rise in the general price level caused by an increase in the cost of production (supply), resulting from a leftward shift in the aggregate supply curve.

An increase in government spending can lead to a rightward shift in the aggregate demand curve, potentially causing demand-pull inflation.

The cyclical upswing and downswing in real GDP, employment, and the price level, caused by shifts in aggregate demand and supply.

A leftward shift in the aggregate demand curve can lead to a recession, characterized by a decrease in real GDP and employment.

A rightward shift in the aggregate demand curve can lead to an expansion, characterized by an increase in real GDP and employment.

A leftward shift in the aggregate supply curve can lead to a downswing in the economy, characterized by a decrease in real GDP and an increase in the price level.

A rightward shift in the aggregate supply curve can lead to an upswing in the economy, characterized by an increase in real GDP and a decrease in the price level.

The real balances effect explains how a decrease in the price level increases the purchasing power of consumers' money, leading to a rise in wealth and ultimately, an increase in demand for goods and services.

The interest-rate effect shows how a decrease in the price level reduces the demand for credit, leading to lower interest rates. Lower interest rates encourage borrowing and investment, boosting demand for goods and services.

The net exports effect suggests that a decrease in the price level makes a country's goods cheaper compared to foreign goods, resulting in increased exports and decreased imports. This boost in net exports (exports minus imports) leads to higher demand.

Factors that determine the overall level of demand in an economy, but are not influenced by the overall price level. These factors directly affect the quantity of real Gross Domestic Product (GDP) demanded.

Components of aggregate spending that contribute to the overall demand for goods and services in an economy. These include spending by households (consumption), businesses (investment), the government (government spending), and foreign buyers (net exports).

Any change in the individual components of aggregate expenditures, such as consumption, investment, government spending, or net exports, leads to a shift in the aggregate demand curve. This shift represents a change in the overall demand for goods and services at all price levels.

Anything that increases aggregate expenditures (consumption, investment, government spending, or net exports) will cause the aggregate demand curve to shift to the right, indicating an increase in the overall quantity of real GDP demanded at all price levels.

Anything that decreases aggregate expenditures (consumption, investment, government spending, or net exports) will cause the aggregate demand curve to shift to the left, indicating a decrease in the overall quantity of real GDP demanded at all price levels.

Classical economics assumes that the price of goods and services, and the price of labor (wages), are completely flexible.

In the classical view, the aggregate supply curve is vertical at the full-employment GDP. This means that any changes in aggregate demand will only affect the price level, not the quantity of output.

The classical theory assumes that prices and wages adjust quickly to changes in demand, restoring the economy to full-employment real GDP. However, Keynesian theory rejects this assumption for economies in recession, arguing that prices and wages are 'sticky' and don't adjust downwards quickly enough.

The Keynesian range represents a severe recession where the economy has a lot of unused resources. Any increase in demand will lead to a large increase in output with little impact on prices.

This range represents an economy moving towards full employment. As demand increases in this range, both output and prices rise.

The classical range represents the economy at its full potential, with all resources fully employed. In this range, any increase in demand only leads to higher prices, not a change in output.

The point where the aggregate demand (AD) curve and the aggregate supply (AS) curve intersect. This represents the equilibrium point where the quantity of real GDP supplied is equal to the quantity of real GDP demanded.

At macroeconomic equilibrium, there is no pressure for either producers or consumers to change their behavior. Sellers don't overestimate or underestimate the demand for their goods, and consumers are satisfied with the amount of goods and services available at the prevailing price level.