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Principles of Economics 2e

Key Terms

Principles of Economics 2eKey Terms
aggregate demand (AD)
the amount of total spending on domestic goods and services in an economy
aggregate demand (AD) curve
the total spending on domestic goods and services at each price level
aggregate demand/aggregate supply model
a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
aggregate supply (AS)
the total quantity of output (i.e. real GDP) firms will produce and sell
aggregate supply (AS) curve
the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level
full-employment GDP
another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment
intermediate zone
portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone
Keynes’ law
“demand creates its own supply”
Keynesian zone
portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat
long run aggregate supply (LRAS) curve
vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run
neoclassical economists
economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run
neoclassical zone
portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep
potential GDP
the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions
Say’s law
“supply creates its own demand”
short run aggregate supply (SRAS) curve
positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed
stagflation
an economy experiences stagnant growth and high inflation at the same time
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