AD Basics
This curve represents total spending in the economy at different price levels.
The Aggregate Demand (AD) curve
This upward-sloping curve shows how much firms supply at each price level in the short run.
The Short-Run Aggregate Supply (SRAS) curve
An increase in government spending shifts the AD curve in this direction.
Right (AD increases)
Short-run equilibrium is found at the intersection of AD and this curve
SRAS (Short-Run Aggregate Supply)
Increasing government spending during a recession is an example of this type of fiscal policy.
Expansionary Fiscal Policy
The AD curve slopes downward due to the wealth effect, interest-rate effect, and this third effect.
The Net Exports Effect
The SRAS slopes upward because wages and input costs are this in the short run.
Sticky (slow to adjust)
A sudden rise in oil prices shifts the SRAS curve in this direction.
Left (a negative supply shock)
In a recessionary gap, wages eventually fall, shifting SRAS right. This process is called this.
Long-Run Self-Correction (or Long-Run Adjustment)
This school of thought believes AD shifts only affect prices in the long run, not real output.
Classical (New Classical) Economics
This letter in Y = C + I + G + NX represents government spending.
G (Government Purchases)
The LRAS curve is vertical at this level of output.
Potential GDP (Natural Rate of Output)
When the Fed cuts interest rates, this component of AD is most directly boosted.
Investment (I)
The difference between actual GDP and potential GDP is called this.
The Output Gap
An initial increase in spending leads to a larger total rise in GDP due to this effect.
The Multiplier Effect
In the AD equation, NX is calculated as exports minus this.
Imports
A technological advancement shifts the LRAS curve in this direction.
Right (increases productive capacity)
Pessimistic business expectations reduce this component of AD, shifting the curve left.
Investment (I)
Higher prices and lower output occurring simultaneously describes this economic condition.
Stagflation
Raising interest rates reduces investment and consumption, shifting AD left. This is an example of this type of policy.
Contractionary Monetary Policy
A drop in consumer confidence shifts the AD curve in this direction.
Left (AD decreases)
When actual output exceeds potential GDP, this type of gap exists.
An Inflationary Gap (Positive Output Gap)
An expanding labor force from immigration primarily shifts this curve to the right.
LRAS (Long-Run Aggregate Supply)
Long-run equilibrium occurs where AD, SRAS, and this curve all intersect.
LRAS (Long-Run Aggregate Supply)
When the central bank increases money supply, AD shifts right in the short run. In the long run, this is the main outcome.
Higher price level (inflation) with output returning to potential GDP