Key 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