12.6 KEY TERMS

Match each of the terms on the left with its definition on the right. Click on the term first and then click on the matching definition. As you match them correctly they will move to the bottom of the activity.

  1. Short-run equilibrium aggregate output
    Aggregate demand curve
    Long-run macroeconomic equilibrium
    Interest rate effect of a change in the aggregate price level
    Short-run macroeconomic equilibrium
    Stagflation
    Wealth effect of a change in the aggregate price level
    Supply shock
    Aggregate supply curve
    Short-run equilibrium aggregate price level
    Short-run aggregate supply curve
    Demand shock
    AD-AS model
    Inflationary gap
    Long-run aggregate supply curve
    Potential output
    Recessionary gap
    Self-correcting
    Output gap
    Sticky wages
    Nominal wage
    Stabilization policy
    shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.
    an event that shifts the aggregate demand curve. A positive demand shock is associated with higher demand for aggregate output at any price level and shifts the curve to the right. A negative demand shock is associated with lower demand for aggregate output at any price level and shifts the curve to the left.
    when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.
    is the quantity of aggregate output produced in the short-run macroeconomic equilibrium.
    an event that shifts the short-run aggregate supply curve. A negative supply shock raises production costs and reduces the quantity supplied at any aggregate price level, shifting the curve leftward. A positive supply shock decreases production costs and increases the quantity supplied at any aggregate price level, shifting the curve rightward.
    when the quantity of aggregate output supplied in the short run is equal to the quantity demanded.
    is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers’ assets.
    shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.
    a state that exists when aggregate output is above potential output.
    when aggregate output is below potential output.
    is the difference between real GDP and potential GDP, often given as a percentage of potential GDP.
    is the combination of rising prices (higher inflation) and falling aggregate output.
    when shocks to aggregate demand affect aggregate output in the short run, but not the long run.
    is the aggregate price level in the short run macroeconomic equilibrium.
    is the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers’ and firms’ money holdings.
    shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.
    are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labour shortages.
    is the use of government policy to reduce the severity and duration of recessions and rein in excessively strong expansions.
    is the dollar amount of the wage paid.
    the basic model used to understand fluctuations in aggregate output and the aggregate price level. It uses the aggregate supply curve and the aggregate demand curve together to analyze the behaviour of the economy in response to shocks or government policy.
    is the level of real GDP the economy would produce if all prices, including nominal wages, were perfectly, or fully, flexible.
    a graphical representation that shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world. The aggregate demand curve has a negative slope due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level.
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