Krugman Textbook Chapter 12 Flashcards
Aggregate Demand Curve
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.
Wealth Effect of Change in 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.
Interest Rate Effect of Change in the Aggregate Price Level
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.
Aggregate Supply Curve
A graphical representation that shows the relationship between the aggregate price level and the total quantity of aggregate output supplied.
Nominal Wage
The dollar amount of any given wage paid.
Sticky Wages
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.
Short-Run Aggregate Supply Curve
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.
Long-Run Aggregate Supply Curve
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.
Potential Output
The level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.
AD-AS Model
The basic model used to understand fluctuations in aggregate output and the aggregate price level. It uses the aggregate supply curve and aggregate demand curve together to analyze the behaviour of the economy in response to shocks or government policy.
Short-Run Macroeconomics Equilibrium
The point at which the quantity of aggregate output supplied is equal to the quantity demanded.
Short-Run Equilibrium Aggregate Price Level
The aggregate price level in short-run macroeconomic equilibrium.
Short-Run Equilibrium Aggregate Output
The quantity of aggregate output produced in short-run macroeconomic equilibrium.
Demand Shock
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 right. A negative demand shock is associated with lower demand for aggregate output at any price level and shifts the curve left.
Supply Shock
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 left. A positive supply shock decreases production costs and increases quantity supplied at any aggregate price level, shifting the curve right.
Stagflation
A combination of inflation and falling aggregate output.
Long-Run Macroeconomic Equilibrium
The point at which the short-run macroeconomic equilibrium is on the long-run aggregate supply curve; so the short-run equilibrium output is equal to potential output.
Recessionary Gap
A state that exists when aggregate output is below potential output.
Inflationary Gap
A state that exists when the aggregate output is above potential output.
Output Gap
The percentage difference between actual aggregate output and potential output.
Self-Correcting
Describes an economy in which shocks to aggregate demand affect aggregate output in the short run but not the long run.
Stabilization Policy
The use of government policy to reduce the severity of recessions and to rein in excessively strong expansions. Monetary and fiscal policy are used to correct these issues.
