๐ Topic Summary
The Aggregate Demand-Aggregate Supply (AD-AS) model is a macroeconomic model that explains price level and output fluctuations in an economy. It comprises the aggregate demand (AD) curve, which slopes downward, and the aggregate supply (AS) curve, which can be short-run (SRAS) or long-run (LRAS). Business cycles are the periodic but irregular ups and downs in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. Understanding how shifts in AD and AS affect the business cycle is crucial for macroeconomic analysis.
๐งฎ Part A: Vocabulary
Match the terms with their definitions:
- Term: Aggregate Demand (AD)
- Term: Aggregate Supply (AS)
- Term: Recession
- Term: Inflation
- Term: Stagflation
- Definition: A period of declining real GDP, income, and rising unemployment.
- Definition: A sustained increase in the general price level in an economy.
- Definition: The total quantity of goods and services that households, firms, the government, and foreign customers want to buy at each price level.
- Definition: A situation in which the economy experiences both high inflation and high unemployment.
- Definition: The total quantity of goods and services that firms are willing and able to supply at each price level.
๐ Part B: Fill in the Blanks
Complete the following paragraph with the correct terms:
An increase in government spending will shift the ________ curve to the ________, leading to a higher ________ and ________ in the short run. However, if the economy is already at full employment, this could lead to ________. A decrease in resource costs will shift the ________ curve to the ________, leading to a lower ________ and higher ________.
๐ค Part C: Critical Thinking
Explain how a supply shock (e.g., a sudden increase in oil prices) can affect both inflation and unemployment in the short run. Use the AD-AS model to illustrate your answer.