Aggregate Demand–Aggregate Supply Essentials Free Online FlashCards

What determines aggregate production?

Real output depends on labor, physical capital, human capital, natural resources, technology, and institutional efficiency: Y = F(L, K, H, R, A).

What is potential output?

Potential output is sustainable real GDP when resources are used at normal rates. The economy can still have frictional and structural unemployment at the natural rate.

What are the four business-cycle stages?

The stages are expansion, peak, contraction, and trough. A sufficiently broad and significant contraction is called a recession.

What is the aggregate-demand expenditure identity?

AD = C + I + G + (X − M), where consumption, investment, government purchases, and net exports are the components.

Why does the AD curve slope downward?

AD slopes downward because a higher price level reduces real wealth, can raise interest rates, and makes domestic goods less competitive internationally.

Why is SRAS generally upward-sloping?

SRAS is generally upward-sloping because some input prices, especially wages, adjust slowly. Higher product prices can temporarily increase firms’ profit margins and output.

Why is LRAS vertical?

LRAS is vertical at potential output because, after wages and other input prices adjust, the price level does not determine sustainable productive capacity.

What distinguishes movement from a curve shift?

A change in the price level causes movement along AD or AS. A change in a non-price determinant, such as confidence, input costs, or technology, shifts a curve.

What happens when consumer confidence rises?

A rise in consumer confidence shifts AD right. In the short run, equilibrium real GDP and the price level generally increase.

How does a sharp oil-price increase affect AD–AS?

A sharp rise in oil prices shifts SRAS left because production costs increase. Short-run real GDP falls while the price level rises, producing stagflation.

How does higher productivity affect aggregate supply?

Higher productivity shifts SRAS right and LRAS right. Firms can produce more at given prices, and the economy’s long-run productive capacity increases.

What does AD–AS equilibrium determine?

AD–AS equilibrium occurs where AD intersects the relevant AS curve. That intersection determines the economy’s equilibrium price level and real GDP.