Glossary
Aggregate Demand (AD)
The total demand for all goods and services produced in an economy at a given price level and time period.
Example:
A significant increase in consumer confidence can lead to a surge in aggregate demand, boosting economic activity.
Inflation
A general and sustained increase in the price level of goods and services in an economy over a period of time, leading to a decrease in the purchasing power of money.
Example:
If your favorite coffee shop raises its prices by 10% every year, you're experiencing the effects of inflation on your daily spending.
Long-Run Aggregate Supply (LRAS)
The total output an economy can produce when all resources are fully employed, representing the economy's potential output and corresponding to the natural rate of unemployment.
Example:
Investments in new technologies and education can shift the LRAS curve to the right, increasing a nation's long-term productive capacity.
Long-Run Phillips Curve (LRPC)
A vertical line at the natural rate of unemployment, indicating that in the long run, there is no trade-off between inflation and unemployment.
Example:
Regardless of how much money the government prints, the economy will always return to its LRPC at the natural rate of unemployment in the long run.
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 a natural rate of unemployment as people transition between jobs or lack specific skills.
Phillips curve
A graph that illustrates the inverse relationship between inflation and unemployment in the short run, reflecting the dynamics of the Aggregate Demand/Aggregate Supply (AD/AS) model.
Example:
When policymakers try to reduce joblessness, they often observe a movement along the Phillips curve, indicating a potential rise in prices.
Short-Run Aggregate Supply (SRAS)
The total output of goods and services that firms are willing and able to produce at different price levels in the short run, given fixed input prices.
Example:
If the cost of labor suddenly increases across the economy, the SRAS curve would shift to the left, indicating less output at each price level.
Short-Run Phillips Curve (SRPC)
A downward-sloping curve showing the temporary trade-off between inflation and unemployment, where lower unemployment is associated with higher inflation.
Example:
If the central bank implements expansionary monetary policy, the economy might move along the SRPC, leading to a temporary decrease in unemployment but an increase in inflation.
Stagflation
A severe economic condition characterized by high inflation, high unemployment, and stagnant economic growth, often resulting from a negative supply shock.
Example:
The oil crisis of the 1970s plunged many economies into stagflation, as rising energy costs led to both higher prices and fewer jobs.
Twin Evils
A term used to describe the undesirable economic situation of simultaneously experiencing high inflation and high unemployment.
Example:
During a severe economic downturn combined with rapid price increases, a country might find itself battling the twin evils.
Unemployment
The state of being jobless while actively seeking employment and being available to work, typically measured as a percentage of the labor force.
Example:
A high unemployment rate can signal a struggling economy, as many people who want to work cannot find jobs.