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Chapter 12
Vocabulary & Key Concepts
40
Economics
12th Grade
04/01/2013

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Term
aggregate demand curve
Definition
shows the relationship between the aggregate price level & the quantity of aggregate output demanded by households, businesses, the government, & the rest of the world
Term
wealth effect of a change in the aggregate price level
Definition
the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' assets
Term
interest rate effect of a change in the aggregate price level
Definition
the effect on consumer spending & investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' & firms' money holdings
Term
5 cases where AD increases
Definition
1. consumers & firms become more optimistic
2. the real value of household assets rises
3. the existing stock of physical capital is relatively small
4. the government increases spending or cuts taxes
5. the central bank increases the quantity of money
Term
5 cases where AD decreaes
Definition
1. consumers & firms become more pessimistic
2. the real value of household assets falls
3. the existing stock of physical capital is relatively large
4. the government reduces spending or raises taxes
5. the central bank reduces quantity of money
Term
the _____ is downward sloping because of the wealth effect of a change in the aggregate price level & the interest rate effect of a change in the aggregate price level
Definition
aggregate demand curve
Term
aggregate supply curve
Definition
shows the relationship between the aggregate price level & the quantity of aggregate output supplied in the economy
Term
nominal wage
Definition
the dollar amount of the wage paid
Term
sticky wages
Definition
nominal wages that are slow to fall even in the face of high unemployment & slow to rise even in the face of labor shortages
Term
short-run aggregate supply curve
Definition
shows the relationship between the aggregate price level & the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed
Term
3 cases where short-run AS curve increases
Definition
1. commodity prices fall
2. nominal wages fall
3. workers become more productive
Term
3 cases where short-run AS curve decreases
Definition
1. commodity prices rise
2. nominal wages rise
3. workers become less productive
Term
long-run aggregate supply curve
Definition
shows the relationship between the aggregate price level & the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible
Term
potential output
Definition
the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible
Term
the _____ illustrates the relationship between the aggregate price level & the quantity of aggregate output supplied
Definition
aggregate supply curve
Term
the _____ is upward sloping: a higher aggregate price level leads to higher aggregate output given that nominal wages are sticky
Definition
short-run AS curve
Term
the _____ is vertical at potential output
Definition
long-run AS curve
Term
AD-AS model
Definition
the aggregate supply curve & the aggregate demand curve are used together to analyze economic fluctuations
Term
short-run macroeconomic equilibrium
Definition
when the quantity of aggregate output supplied is equal to the quantity demanded
Term
short-run equilibrium aggregate price level
Definition
the aggregate price level in the short-run macroeconomic equilibrium
Term
short-run equilibrium aggregate output
Definition
the quantity of aggregate output produced in the short-run macroeconomic equilibrium
Term
demand shock
Definition
an event that shifts the aggregate demand curve
Term
supply shock
Definition
an event that shifts the short-run aggregate supply curve
Term
stagflation
Definition
the combination of inflation & falling aggregate output
Term
long-run macroeconomic equilibrium
Definition
when the point of short-run macroeconomic equilibrium is on the long-run AS curve
Term
recessionary stage
Definition
when aggregate output is below potential output
Term
inflationary gap
Definition
when aggregate output is above potential output
Term
output gap
Definition
the percentage difference between actual aggregate output & potential output
Term
self-correcting
Definition
when shocks to AD affect aggregate output in the short run, but not the long run
Term
the _____ is used to study economic fluctutations
Definition
AD-AS model
Term
_____ occurs at the intersection of the short-run AS & AD curves
Definition
short-run macroeconomic equilibrium
Term
short-run macroeconomic equilibrium determines the _____ & the level of _____
Definition
short-run equilibrium aggregate price level; short-run equilibrium aggregate output
Term
a _____, a shift of the AD curve, causes the aggregate price level & aggregate output to move in the same direction
Definition
demand shock
Term
a _____, a shift of the SRAS curve, causes the aggregate price level & aggregate output to move in opposite directions
Definition
supply shock
Term
_____ is the consequence of a negative supply shock
Definition
stagflation
Term
a fall in nominal wages occurs in response to a _____, & a rise in nominal wages occurs in response to an _____
Definition
recessionary gap; inflationary gap
Term
recessionary gap & inflationary gap move the economy to _____, where the AD, SRAS, & LRAS curves intersect
Definition
long-run macroeconomic equilibrium
Term
the _____ always tends toward zero because the economy is self-correcting in the long run
Definition
output gap
Term
stabilization policy
Definition
the use of government policy to reduce the severity of recessions & rein in excessively strong expansions
Term
_____ is the use of fiscal or monetary policy to offset demand shocks
Definition
stabilization policy
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