Gretel's AP Macroeconomics Blog

AGGREGATE SUPPLY Aggregate supply (AS) is the level of real GDP that firms will produce at each price level Long-run is the period of time where input prices are completely flexible and adjust to changes in the price level. In the long-run, the level of real GDP supplied is independent of the price level. Short-run is the period of time where input prices are sticky and don't adjust to changes in the price level. In the short-run, the level of real GDP supplied is directly related to the price level. The two types of aggregate supply are:  - long-run aggregate supply (LRAS)  - short-run aggregate supply (SRAS). Long-run aggregate supply marks the level of full employment in the economy. Because input prices are completely flexible in the long-run, changes in price level don't change firms' real profits and therefore don't change firms' level of output.  LRAS is vertical at the economy's...

AGGREGATE DEMAND Aggregate demand (AD) shows the amount of real GDP that the private, public, and foreign sector collectively want to purchase at each possible price level. It is the demand by consumers, businesses, government, and foreign countries. It changes in price level which causes movement along the curve, not a shift of the curve. The relationship between the price level and the level of real GDP is inverse. The formula for aggregate demand is: AD = C + Ig + G + Xn The 3 reasons why aggregate demand is downward sloping are wealth effect , interest-rate effect , and foreign trade effect. Wealth Effect h igher prices reduce the power of the dollar this decreases the quantity of expenditures l ower price levels increase purchasing power and increase expenditures Interest-Rate Effect a s price level increases, lenders need to charge higher interest rates to get a REAL return on their loans h igher interest rates discourage consumer spending and bu...

Unemployment Population -the number of people in a country Labor force -the number of people in a country that are classified as either employed or unemployed People who are employed...: are able and willing to work must be 16 years old or older must work at least one hour every two weeks                                                                                                                                                            People who are unemployed : are people who are 16 years of age or older that don't have a job Unemploym...

Inflation - a general rise in the price level - ex: an increase in gas prices in the same day Deflation -a general decline in the price level -ex: a decrease in gas prices in the same day Disinflation -is when the inflation rate itself declines -ex: gas prices staying the same throughout the week Real interest rate -the cost of borrowing money that is adjusted for inflation -the formula is: real interest rate = nominal interest rate - expected inflation rate Nominal interest rate   -the unadjusted cost of borrowing money -the formula is: nominal interest rate = real interest rate + expected inflation rate Demand-pull inflation   -is caused by an increase of the demand output that pulls the price upward -it's triggered by an increase in the total demand, which causes output and employment to rise, which also causes the price level to rise Cost-push inflation -an increase in the cost of factors ...