Key Terms
Aggregate supply
The total quantity of output (real GDP) firms will produce and sell at each aggregate price level, holding input prices
Potential GDP
Maximum sustainable output with full employment of all resources; also called full employment GDP
Short run
The period when wages (and some prices) are sticky; they do not immediately adjust to changes in demand.
Short run aggregate supply (SRAS)
The positive relationship between the price level and real GDP when input prices are held fixed. This is the upward-slop
Long run
The period when all wages and prices are fully flexible.
Long run aggregate supply (LRAS)
A vertical line at potential GDP. In the long run, real GDP equals potential regardless of the price level.
Aggregate demand (AD)
Total planned spending on domestic goods and services at each price level
Formula
AD = C + I + G + X - M
Positive demand shock
AD shifts right; greater spending at every price level; real GDP rises; price level rises. Negative demand shock: AD shi
Positive supply shock
AS shifts right; more output at every price level; real GDP rises; price level falls. Negative supply shock: AS shifts l
Productivity
Output per unit of input; primary long-run driver of AS
Stagflation
Simultaneous stagnant growth and high inflation; caused by a leftward AS shift
Aggregate supply (AS)
Total quantity of real GDP firms will produce and sell at each price level
AD-AS model
The macroeconomic model showing how AD and AS interact to determine equilibrium real GDP and price level
SRAS
Short run aggregate supply; upward sloping; wages and some prices are sticky