| Term | Definition |
|---|
| say's law | supply creates it's own demand; so desired expenditures will = actual expenditures |
| assuptions of classical model | pure competition exists, wages and prices are flexible, people are motivated by self-interest, people cannot be fooled by money illusion |
| money illusion | reacting to changes in money prices rather than relative prices |
| classical economics | market will correct itself and any problems in macroeconomy will be temporary |
| investment | refers only to additions to the nation's capital stock |
| increased interest rates (classical) | imply people desire to save more |
| labor market (classical) | increase in the quantity of labor input increases real GDP |
| equilibrium real GDP (Keynesian) | determined by aggregate demand |
| keynesian economics | prices, (ex. cost of labor=wages) were inflexible downward due to the existence of unions and long-term contracts between businesses and workers |
| short run aggregate supply curve | the relationship between total planned economywide production and the price level in the short run |
| causes of increased aggregate supply | new raw materials, increased competition, reduces internation trade barriers, lesss impediments to business, increase in supply of labor, increased education, decreased marginal tax rates, reduction in input prices |
| causes of decreased aggregate supply | depletion of raw materials, decreased competition, increase in international trade barriers, more impediments to business, decrease in labor supply, decrease in education, increase in marginal tax rates, increase in input prices |
| aggregate demand shock | any event that causes the aggregate demand curve to shift inward or outward |
| recessionary gap | the gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the LRAS curve |
| aggregate supply shock | any event that causes the aggregate supply curve to shift inward or outwards |
| inflationary gap | the gap exists whenever equilibrium real GDP per year is greater than full employment real GDP as shown by the position of the LRAS curve |
| cost-push inflation | inflation caused by decreases in SRAS |
| demand-pull inflation | inflation caused by increases in aggregate demand not matched by increases in aggregate supply |
Combine with other sets
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