Glossary
Aggregate Demand (AD)
The total quantity of goods and services demanded by households, firms, the government, and foreign buyers at different price levels in a given period.
Example:
A significant increase in government spending on infrastructure projects would cause the Aggregate Demand curve to shift to the right.
Aggregate Equilibrium
The point where the total quantity of goods and services demanded in an economy equals the total quantity supplied.
Example:
When the U.S. economy is producing at a stable level where overall spending matches overall production, it's experiencing aggregate equilibrium.
Equilibrium Gaps
Situations where the short-run equilibrium output is either above or below the economy's potential output, indicating an imbalance.
Example:
Policymakers often analyze equilibrium gaps to determine if the economy needs a boost or a slowdown to return to its ideal state.
Fiscal Policy
The use of government spending and taxation to influence the economy, typically to stabilize output and employment.
Example:
Cutting income taxes is a form of expansionary fiscal policy aimed at boosting consumer spending and aggregate demand.
Full-Employment Level of Real Output
The level of real GDP produced when the economy is operating at its natural rate of unemployment, utilizing all available resources efficiently.
Example:
When the unemployment rate is around 5%, the economy is generally considered to be at its full-employment level of real output, even with some frictional and structural unemployment.
Government Intervention
Actions taken by the government, such as using fiscal or monetary policy, to influence the economy and move it towards a desired outcome.
Example:
To combat a deep recession, the government might engage in government intervention by increasing spending on public works projects.
Inflationary Gap (Positive Output Gap)
Occurs when the short-run equilibrium output is above the full-employment level, leading to low unemployment, high output, and potential for rising prices.
Example:
If consumer confidence is extremely high and everyone is spending, the economy might enter an inflationary gap, causing prices to rise rapidly due to excessive demand.
Long-Run Aggregate Supply (LRAS)
A vertical curve representing the economy's potential output or full-employment level of real GDP, independent of the price level in the long run.
Example:
Technological advancements that boost productivity would shift the Long-Run Aggregate Supply curve to the right, indicating higher potential output.
Long-Run Equilibrium
A state where the economy is producing at its potential output, with the AD, SRAS, and LRAS curves all intersecting at a single point.
Example:
Achieving long-run equilibrium means the economy is operating efficiently, with full employment and stable prices, like a perfectly tuned engine.
Natural Rate of Unemployment
The unemployment rate that exists when the economy is at full employment, consisting only of frictional and structural unemployment.
Example:
Even when the economy is booming, there will always be some people between jobs or whose skills don't match available positions, contributing to the natural rate of unemployment.
Potential Output
The maximum sustainable level of real GDP that an economy can produce when it is using all its resources efficiently and at the natural rate of unemployment.
Example:
If a country invests heavily in education and technology, its potential output could increase, allowing it to produce more goods and services in the future.
Recessionary Gap (Negative Output Gap)
Occurs when the short-run equilibrium output is below the full-employment level, characterized by high unemployment and underutilized resources.
Example:
During the 2008 financial crisis, the U.S. economy experienced a significant recessionary gap, with many people losing jobs and factories operating below capacity.
Self-Correction
The idea that the economy can naturally return to its long-run equilibrium without government intervention, primarily through changes in wages and prices.
Example:
After a recession, some economists believe that falling wages and prices will eventually stimulate demand and production, leading to self-correction back to full employment.
Short-Run Aggregate Equilibrium
Occurs at the intersection of the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SRAS) curve, determining the current price level and real output.
Example:
If consumer spending suddenly drops, the short-run aggregate equilibrium might shift to a lower output level, indicating a temporary slowdown.
Short-Run Aggregate Supply (SRAS)
The total quantity of goods and services that firms are willing and able to produce at different price levels in the short run, assuming input prices are sticky.
Example:
If the cost of raw materials unexpectedly rises, the Short-Run Aggregate Supply curve would shift to the left, indicating less output at each price level.
Shortage (in GDP)
A situation where the quantity of aggregate demand exceeds the quantity of aggregate supply at a given price level, leading to unmet demand.
Example:
When prices are too low, everyone wants to buy, creating a shortage of available goods and services in the market.
Surplus (in GDP)
A situation where the quantity of aggregate supply exceeds the quantity of aggregate demand at a given price level, leading to unsold goods.
Example:
If prices are set too high, consumers might buy less, leading to a surplus of goods in the economy and potentially forcing businesses to cut production.