krugmanwellsmodulesmacro3

Key Terms

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 macroeconomic equilibrium

Short-run equilibrium aggregate price level

Short-run equilibrium aggregate output

Demand shock

Supply shock

Stagflation

Long-run macroeconomic equilibrium

Recessionary gap

Inflationary gap

Output gap

Self-correcting

Stabilization policy

the aggregate price level in short-run macroeconomic equilibrium.

a graphical representation of the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

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.

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.

the quantity of aggregate output produced in short-run macroeconomic equilibrium.

a graphical representation of 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. 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.

a situation in which the short-run macroeconomic equilibrium is also on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output.

the percentage difference between actual aggregate output and potential output.

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

a graphical representation of the relationship between the aggregate price level and the quantity of aggregate output supplied 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.

any 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.

exists when aggregate output is below potential output.

describes the economy, referring to the fact that in the long run, shocks to aggregate demand affect aggregate output in the short run, but not in the long run.

the dollar amount of any given wage paid.

the point at which the quantity of aggregate output supplied is equal to the quantity demanded.

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 they decrease their consumption; a fall in the aggregate price level increases the purchasing power of consumers’ assets, so they increase their consumption.

the gap that exists when aggregate output is above potential output.

the combination of inflation and falling aggregate output.

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.

a graphical representation of the relationship between the aggregate price level and the total quantity of aggregate output supplied.

the basic model used to understand fluctuations in aggregate output and the aggregate price level. It uses the aggregate demand curve and the aggregate supply curve together to analyze the behavior of the economy in response to shocks or government policy.

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.