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aggregate demand-aggregate supply model (AD-AS model)
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The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output.
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real-balances effect
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A higher price level reduces the real value or purchasing power of the public's accumulated savings balances.
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interest-rate effect
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The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
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foreign purchases effect
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The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
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determinants of aggregate demand
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-A change in one of the determinants of aggregate demand that directly changes the amount of real GDP demanded
-A multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending
-A multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending
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aggregate supply
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A schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce.
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immediate-short-run aggregate supply curve
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An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts; a horizontal aggregate supply curve that implies an inflexible price level. (horizontal line)
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short-run aggregate supply curve
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Shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed
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long-run aggregate supply curve
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Shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible (vertical at the economy's full-employment output)
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determinants of aggregate supply
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Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
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productivity
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A measure of the relationship between a nation's level of real output and the amount of resources uses to produce that output. (productivity = total output / total inputs)
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equilibrium price level
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The price level at which the aggregate demand curve intersects the aggregate supply curve.
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equilibrium real output
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The GDP at which the total quantity of final goods and services purchased is equal to the total quantity of final goods and services produced.
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menu costs
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The costs of changing prices
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efficiency wages
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Wages that elicit maximum work effort and thus minimize labor costs per unit of output.
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