Chapter 8 Aggregate Demand And Aggregate Supply Flashcards
Aggregate
Means total
Aggregate demand
Total expenditure ( and income) in the economy
Aggregate supply
Total production in the economy
Equilibrium will occur
Where aggregate demand and aggregate supply are equal.
That is where total planned expenditure by consumers equals total production by businesses.
Components of aggregate demand
Consumption and savings Investment Government spending and taxes Exports and imports ( spending) Money supply
Components of aggregate supply
Cost of production
Productivity
Technology
Supply shocks
Aggregate supply differs
In the short run and the long run.
Short Rate Aggregate Supply (SRAS)
Has an upward slope because there is difference in the time that prices rise and the time that workers react, creating a profit opportunity for employers.
Long Run Aggregate Supply (LRAS)
Is vertical, indicating an environment where
Prices are flexible
Full employment is achieved in the economy
Changes in the AD do not affect the output.
The LARS can also be thought of as
Indicating Full Employment Real GDP or Natural Real GDP
If equilibrium Real GDP exceeds Full Employment Real GDP.
An inflationary gap exists.
If equilibrium Real GDP is less than Full Employment Real GDP,
A recessionary gap exists.
