Economics Chapter 26: Aggregate Output and Prices

The total supply of all goods and services that firms in an economy are willing and able to produce at various price levels.

A graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.

The AS curve is upward sloping due to increasing costs of production as output rises. As prices go up, firms are willing to produce more but at a higher cost.

Changes in resource prices, technology, taxes, subsidies, and expectations about future prices can shift the AS curve.

The total demand for goods and services in an economy at all price levels.

A graph showing the relationship between the price level and the quantity of real GDP demanded.

The AD curve is downward sloping because of the wealth effect, interest rate effect, and exchange rate effect.

The intersection of the AD and AS curves represents the equilibrium point where the quantity of goods and services produced equals the quantity demanded at a given price level.

A curve that shows the relationship between the price level and the quantity of output supplied in the short run. It is upward sloping because wages are sticky in the short run, meaning they don't adjust immediately to changes in prices.

A change in the cost of production that shifts the short-run aggregate supply curve. Examples include changes in the price of oil or a natural disaster.

The maximum level of output that an economy can produce with its existing resources and technology. It represents the vertical part of the short-run AS curve.

The total amount of spending planned in the economy, including consumption, investment, government spending, and net exports.

The effect of changes in the interest rate on planned aggregate expenditure. Higher interest rates discourage borrowing and investment, reducing aggregate demand.

The effect of changes in the price level on the value of real wealth. Higher prices reduce the real value of wealth, leading to lower spending.

The effect of changes in the price level on the exchange rate. Higher prices make domestic goods more expensive relative to foreign goods, leading to lower net exports.

The relationship between the interest rate and aggregate output in the goods market. It shows all the combinations of interest rates and output levels where planned expenditure equals actual expenditure.

A policy tool used by the Federal Reserve to influence interest rates and, consequently, economic activity.

An equation that demonstrates how the Fed's interest rate decision is influenced by the state of the economy, particularly output and inflation.

The level of output at which planned aggregate expenditure equals actual output. It's the equilibrium point in the goods market.

An increase in government spending shifts the IS curve to the right, leading to a higher equilibrium output for a given interest rate.

A higher interest rate discourages investment, causing a decrease in planned aggregate expenditure, which ultimately leads to a lower equilibrium output level.

Factors that influence the Fed's interest rate decision alongside output and inflation.

The point at which the Fed's interest rate target is exactly equal to the equilibrium interest rate in the goods market. It's the intersection of the IS curve and the Fed's monetary policy rule.

The Fed Chair's influence on the economy through interest rates and monetary policy.

The Fed raises interest rates when output increases to control inflation. This move shifts the Fed rule left, influencing the equilibrium output.

The aggregate demand (AD) curve shows the relationship between the price level and the total demand for goods and services in an economy. It slopes downwards because a higher price level leads the Fed to raise interest rates, which lowers investment and output.

The AD curve is derived from the equilibrium points of output and interest rates based on different price levels. It reflects the negative relationship between price level and aggregate output, influenced by the Fed's response to inflation.

The Fed's primary focus is on a price index called the Core Personal Consumption Expenditures (PCE) which excludes volatile food and energy prices to provide a more stable measure of inflation.

The Fed's policy might change if it included energy and food prices in its inflation measure. For example, the Fed might raise interest rates more aggressively during periods of high energy or food inflation.

The equilibrium output and price level are determined by the intersection of the aggregate supply (AS) and aggregate demand (AD) curves.

The aggregate supply (AS) curve shows the relationship between the price level and the quantity of goods and services that firms are willing and able to produce. The AS curve can shift due to changes in resource prices, technology, or government policy.

The change in consumption due to changes in real wealth caused by changes in the price level.

The level of aggregate output an economy can sustain in the long run without inflation.

The vertical portion of the short-run AS curve illustrates that the economy has a limited capacity to produce goods and services.

The situation where planned aggregate expenditure (AE) exceeds potential output, leading to a rise in the price level.

The change in consumption (C) caused by alterations in the real value of assets brought about by price level shifts.

The long-run aggregate supply curve is vertical, reflecting the idea that the economy produces at potential output regardless of the price level in the long run.