KEY CONCEPTS The Aggregate demand and supply model provides a framework for our study of the opera- tion of the economy. Aggregate demand is the negative relationship between planned aggregate expenditure on final goods and services and the price level, assuming all other conditions in the economy are constant. Aggregate supply is the positive relationship between outputs of goods and services and the price level, assuming factor prices, capital stock, and technology are constant. Short-run equilibrium real GDP and price are determined by short-run aggregate demand and aggregate supply, illustrated by the intersection of the AD and AS curves. Potential output is the output the economy can produce on an ongoing basis with given labour, capital, and technology without putting persistent upward pressure on prices or infla- tion rates. The Natural unemployment rate is the full employment' unemployment rate observed when the economy is in equilibrium at potential output. Growth in potential output comes from growth in the labour force and growth in labour productivity coming from improvements in technology as a result of investment in fixed and human capital. Business cycles are the short-run fluctuations in real GDP and employment relative to Poten- tial Output (GDP) and full employment caused by short-run changes in aggregate demand and supply. Output gaps are the differences between actual real GDP and potential GDP that occur during business cycles.
KEY CONCEPTS The Aggregate demand and supply model provides a framework for our study of the opera- tion of the economy. Aggregate demand is the negative relationship between planned aggregate expenditure on final goods and services and the price level, assuming all other conditions in the economy are constant. Aggregate supply is the positive relationship between outputs of goods and services and the price level, assuming factor prices, capital stock, and technology are constant. Short-run equilibrium real GDP and price are determined by short-run aggregate demand and aggregate supply, illustrated by the intersection of the AD and AS curves. Potential output is the output the economy can produce on an ongoing basis with given labour, capital, and technology without putting persistent upward pressure on prices or infla- tion rates. The Natural unemployment rate is the full employment' unemployment rate observed when the economy is in equilibrium at potential output. Growth in potential output comes from growth in the labour force and growth in labour productivity coming from improvements in technology as a result of investment in fixed and human capital. Business cycles are the short-run fluctuations in real GDP and employment relative to Poten- tial Output (GDP) and full employment caused by short-run changes in aggregate demand and supply. Output gaps are the differences between actual real GDP and potential GDP that occur during business cycles.
Chapter1: Making Economics Decisions
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KEY CONCEPTS
The Aggregate demand and supply model provides a framework for our study of the opera-
tion of the economy.
Aggregate demand is the negative relationship between planned aggregate expenditure on
final goods and services and the price level, assuming all other conditions in the economy are
constant.
Aggregate supply is the positive relationship between outputs of goods and services and the
price level, assuming factor prices, capital stock, and technology are constant.
Short-run equilibrium real GDP and price are determined by short-run aggregate demand
and aggregate supply, illustrated by the intersection of the AD and AS curves.
Potential output is the output the economy can produce on an ongoing basis with given
labour, capital, and technology without putting persistent upward pressure on prices or infla-
tion rates.
The Natural unemployment rate is the full employment' unemployment rate observed
when the economy is in equilibrium at potential output.
Growth in potential output comes from growth in the labour force and growth in labour
productivity coming from improvements in technology as a result of investment in fixed and
human capital.
Business cycles are the short-run fluctuations in real GDP and employment relative to Poten-
tial Output (GDP) and full employment caused by short-run changes in aggregate demand and
supply.
Output gaps are the differences between actual real GDP and potential GDP that occur during
business cycles.
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