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.

Question

Aggregate demand curve
Wealth effect of a change in the aggregate price level
Interest rate effect of a change in the aggregate price level
Aggregate supply curve
Nominal wage
Sticky wages
Short-run aggregate supply curve
Long-run aggregate supply curve
Potential output
AD–AS model
Short-run equilibrium aggregate output
Demand shock
Supply shock
Stagflation
Long-run macroeconomic equilibrium
Recessionary gap
Inflationary gap
Output gap
Self-correcting
Stabilization policy
Short-run equilibrium aggregate price level
Short-run macroeconomic equilibrium
exists when aggregate output is above potential output
a graphical representation that shows the relationship between the aggregate price level and the total quantity of aggregate output supplied in the economy
an event that shifts the shortrun 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
describes an economy in which shocks to aggregate demand affect aggregate output in the short run but not in the long run
a graphical representation that shows the positive 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, particularly nominal wages, can be taken as fixed. The short-run aggregate supply curve has a positive slope because a rise in the aggregate price level leads to a rise in profits, and therefore output, when production costs are fixed
the combination of inflation and falling aggregate output
the point at which the short-run macroeconomic equilibrium is on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output
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
the effect on consumer spending caused by the change in the purchasing power of consumers’ assets when the aggregate price level changes. A rise in the aggregate price level decreases the purchasing power of consumers’ assets, so consumers decrease their consumption; a fall in the aggregate price level increases the purchasing power of consumers’ assets, so consumers increase their consumption
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 behavior of the economy in response to shocks or government policy
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
the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible
the aggregate price level in short-run macroeconomic equilibrium
the quantity of aggregate output produced in short-run macroeconomic equilibrium
the effect on consumer spending and investment spending caused by a change in the purchasing power of consumers’ money holdings when the aggregate price level changes. A rise (fall) in the aggregate price level decreases (increases) the purchasing power of consumers’ money holdings. In response, consumers try to increase (decrease) their money holdings, which drives up (down) interest rates, thereby decreasing (increasing) consumption and investment
the use of government policy to reduce the severity of recessions and to rein in excessively strong expansions. There are two main tools of stabilization policy: monetary policy and fiscal policy
nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
a graphical representation that 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. The long-run aggregate supply curve is vertical because the aggregate price level has no effect on aggregate output in the long run; in the long run, aggregate output is determined by the economy’s potential output
the percentage difference between actual aggregate output and potential output
exists when aggregate output is below potential output
the dollar amount of any given wage paid
the point at which the quantity of aggregate output supplied is equal to the quantity demanded

Aggregate demand curve, p. 412

Wealth effect of a change in the aggregate price level, p. 413

Interest rate effect of a change in the aggregate price level, p. 414

Aggregate supply curve, p. 418

Nominal wage, p. 419

Sticky wages, p. 419

Short-run aggregate supply curve, p. 420

Long-run aggregate supply curve, p. 424

Potential output, p. 425

AD–AS model, p. 428

Short-run macroeconomic equilibrium, p. 428

Short-run equilibrium aggregate price level, p. 428

Short-run equilibrium aggregate output, p. 428

Demand shock, p. 429

Supply shock, p. 430

Stagflation, p. 431

Long-run macroeconomic equilibrium, p. 432

Recessionary gap, p. 432

Inflationary gap, p. 434

Output gap, p. 434

Self-correcting, p. 435

Stabilization policy, p. 437