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Adverse Supply Shocks
Economic changes that suddenly and drastically increase the cost of inputs and thus shift the aggregate supply curve to the left.
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Aggregate Demand
The total demand for goods and services in an economy.
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Aggregate Supply
The total supply of goods and services in an economy.
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AS-AD Model
The model of aggregate supply and aggregate demand that is used to evaluate the effects of economic policy decisions.
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Capital
Physical machines and human experience that lead to productivity.
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Capital Stock
The total amount of capital, both physical and human, that exists in an economy.
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Contractionary Policy
Monetary and fiscal policy that shifts the aggregate demand curve to the left.
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Expansionary Policy
Monetary and fiscal policy that shifts the aggregate demand curve to the right.
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Expected Price Level
The level of prices that firms believe will exist at the time that contracts are made.
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Factors of Production
Refers to capital and labor, as these are the inputs that lead to productivity.
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Investment
Money spent on the improvement of the capital stock.
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Labor
Physical effort supplied by workers producing output.
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Labor Force
The total number of people working at the production of output.
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Labor Market
The market for workers where the demand for labor and the supply for labor are equilibrated by the wage.
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Menu Costs
The financial costs to firms of having to reprint menus, catalogues, and other price-listing materials in response to economic changes.
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Natural Rate of Output
The rate of output when the factors of production, capital and labor, are used at their normal rates.
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Nominal Wage
The amount of money paid to a worker in terms of actual currency, not purchasing power.
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Output
Goods and services produced by workers and firms.
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Positive Supply Shocks
Economic changes that suddenly and drastically decrease the cost of inputs and thus shift the aggregate supply curve to the right.
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Price Level
The overall cost of goods and services in an economy.
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Real Wage
The amount of money paid to a worker in terms of purchasing power, not actual currency.
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Stagflation
A condition where the price level increases and output decreases. This usually results from an adverse supply shock.
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Supply Shock
An economic change that suddenly and drastically affects the cost of inputs and thus shifts the aggregate supply curve. C.f. adverse supply shocks and positive supply shocks.
Terms
Formulae
| Aggregate supply = Y = Ynatural + a(P - Pexpected) | In this formula Y is output, Ynatural is the natural rate of output that exists when all productive factors are used at their normal rates, a is a constant greater than zero, P is the price level, and Pexpected is the expected price level. |
| Aggregate demand = Y = C(Y - T) + I(r) + G + NX(e) | In this formula, Y is output, C(Y - T) is consumption as a function of disposable income, I(r) is investment as a function of the real interest rate, G is government spending, and NX(e) is net exports as a function of the real exchange rate. |
