Key Terms
Key Terms
aggregate (AD) the amount of total spending on domestic goods and services in an economy the total spending on domestic goods and services at each level a that shows what determines total supply or total for the economy, and how total and total supply interact at the macroeconomic level aggregate supply (AS) the total quantity of output (i.e. ) firms will produce and sell the total quantity of output (i.e. ) that firms will produce and sell at each level another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment intermediate zone portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone Keynes’ law “demand creates its own supply” Keynesian zone portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat long run aggregate supply (LRAS) curve vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run neoclassical economists economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run neoclassical zone portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep potential GDP the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions Say’s law “supply creates its own demand” short run aggregate supply (SRAS) curve positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed stagflation an economy experiences stagnant growth and high inflation at the same time
Key Concepts and Summary
11.1 Macroeconomic Perspectives on Demand and Supply
emphasize , which holds that supply creates its own . Keynesian economists emphasize , which holds that creates its own supply. Many mainstream economists take a Keynesian perspective, emphasizing the importance of aggregate , for the , and a , emphasizing the importance of aggregate supply, for the .
11.2 Building a Model of Aggregate Demand and Aggregate Supply
The upward-sloping shows the positive relationship between the level and the level of in the . Aggregate supply slopes up because when the level for outputs increases, while the level of remains fixed, the opportunity for additional profits encourages more . The aggregate supply curve is near-horizontal on the left and near-vertical on the right. In the , we show the aggregate supply by a vertical line at the level of potential output, which is the maximum level of output the economy can produce with its existing levels of workers, , , and economic institutions. The downward-sloping shows the relationship between the price level for outputs and the quantity of total spending in the economy. It slopes down because of: (a) the wealth effect, which means that a higher price level leads to lower real wealth, which reduces the level of consumption; (b) the interest rate effect, which holds that a higher price level will mean a greater demand for money, which will tend to drive up interest rates and reduce investment spending; and (c) the foreign price effect, which holds that a rise in the price level will make domestic goods relatively more expensive, discouraging exports and
Text from Principles of Macroeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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