Economics Chapter 12 Flashcards

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Questions and Answers

What does the aggregate demand curve show?

The level of potential GDP

The relationship between aggregate price level and quantity of aggregate output demanded (correct)

The relationship between nominal wages and labor supply

The investment decisions of firms

What is the wealth effect of a change in aggregate price level?

The effect on consumer spending caused by the change in purchasing power of consumers' assets.

What does the interest rate effect of a change in aggregate price level refer to?

The effect on consumer spending and investment spending caused by a change in purchasing power of money holdings.

What does the aggregate supply curve illustrate?

The relationship between aggregate price level and quantity of aggregate output supplied Signup and view all the answers

What is a nominal wage?

The dollar amount of wage paid. Signup and view all the answers

What are sticky wages?

Nominal wages that are slow to adjust to changes in economic conditions. Signup and view all the answers

What does the short-run aggregate supply curve represent?

The relationship between aggregate price level and quantity of output supplied in the short run. Signup and view all the answers

What does the long-run aggregate supply curve indicate?

The relationship between aggregate price level and quantity of output supplied when all prices are flexible. Signup and view all the answers

What is potential output?

The level of real GDP produced if all prices are fully flexible. Signup and view all the answers

What does the AD-AS model analyze?

Economic fluctuations using the aggregate supply and aggregate demand curves. Signup and view all the answers

When is the economy in short-run macroeconomic equilibrium?

When the quantity of aggregate output supplied equals the quantity demanded. Signup and view all the answers

What is the short-run equilibrium aggregate price level?

The aggregate price level in short-run macroeconomic equilibrium. Signup and view all the answers

What is short-run equilibrium aggregate output?

The quantity of aggregate output produced in short-run macroeconomic equilibrium. Signup and view all the answers

What is a demand shock?

An event that shifts the aggregate demand curve. Signup and view all the answers

What is a supply shock?

An event that shifts the short-run aggregate supply curve. Signup and view all the answers

What is stagflation?

The combination of inflation and falling aggregate output Signup and view all the answers

When is the economy in long-run macroeconomic equilibrium?

When the short-run macroeconomic equilibrium is on the long-run aggregate supply curve. Signup and view all the answers

What defines a recessionary gap?

When aggregate output is below potential output. Signup and view all the answers

What describes an inflationary gap?

Aggregate output is above potential output. Signup and view all the answers

What is the output gap?

The percentage difference between actual aggregate output and potential output. Signup and view all the answers

What does it mean when the economy is self-correcting?

Shocks to aggregate demand affect output in the short run but not in the long run. Signup and view all the answers

What is stabilization policy?

The use of government policy to reduce the severity of recessions and control strong expansions. Signup and view all the answers

Study Notes

Aggregate Demand and Supply

The aggregate demand curve depicts the inverse relationship between the aggregate price level and the total output demanded by various sectors including households, businesses, government, and foreign entities.
The aggregate supply curve illustrates the relationship between the aggregate price level and the total output supplied in the economy.

Economic Impact of Price Level Changes

The wealth effect indicates how changes in the aggregate price level affect consumer purchasing power and subsequently influence consumer spending.
The interest rate effect describes how fluctuations in the aggregate price level impact consumer and business spending by altering the purchasing power of money holdings.

Wage Dynamics

Nominal wage refers to the dollar amount paid to workers for their labor.
Sticky wages are wages that do not quickly adjust to economic conditions, remaining stable even in situations of high unemployment or labor shortages.

Aggregate Supply Framework

The short-run aggregate supply curve represents the amount of output supplied in the short run, where many costs are considered fixed.
The long-run aggregate supply curve shows the output supplied when all prices, including wages, are flexible—indicative of the economy's potential output.

Economic Equilibrium

Potential output reflects the real GDP level if all prices were flexible, representing the economy's ideal output capacity.
Short-run macroeconomic equilibrium occurs when the quantity of output supplied matches the quantity demanded.
The short-run equilibrium aggregate price level and short-run equilibrium aggregate output represent the price level and output produced when the economy is in short-run equilibrium.

Economic Fluctuations

A demand shock is an event that leads to a shift in the aggregate demand curve.
A supply shock results in a shift in the short-run aggregate supply curve.
Stagflation refers to the simultaneous occurrence of inflation and declining output.

Long-Term Economic Stability

Long-run macroeconomic equilibrium occurs when the economy's short-run equilibrium aligns with the long-run aggregate supply curve.
An inflationary gap describes a scenario where actual output exceeds potential output, while a recessionary gap occurs when actual output is below potential output.
The output gap measures the percentage difference between actual output and potential output.

Automatic Market Corrections

The economy is deemed self-correcting when short-term shocks to aggregate demand affect output temporarily, but long-term output adjusts back to potential levels.
Stabilization policy involves government interventions to mitigate severe recessions and temper excessively rapid expansions.

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Description

Test your knowledge on key concepts from Economics Chapter 12 with these flashcards. This set includes definitions and explanations of important terms such as the aggregate demand curve and the wealth effect. Perfect for reinforcing your understanding of consumer behavior and economic principles.