Gdp of the economy under conditions of unemployment

This preview shows page 9 - 12 out of 18 pages.

GDP of the economy under conditions of unemployment-the full employment model of real GDP. Base-year dollars The value of a current sum expressed in terms of prices in a base year. Endowments The various resources in an economy, including both physical resources and such human resources as ingenuity and management skills Aggregate demand The total of all planned expenditures in the entire economy. Aggregate demand curve A curve showing the planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant. Real-balance effect The change in expenditures resulting from a change in the real value of money balances when the price level changes, all other things held constant; also called the wealth effect. Interest rate effect One of the reasons the aggregate
ECO201 Terminology demand curve slopes downward; Higher price levels increase the interest rate, which in turn causes businesses and consumers to reduce desired spending due to the higher cost of borrowing. Open economy effect One of the reasons the aggregate demand curve slopes downward; Higher price levels result in foreign residents desiring to buy fewer US made goods, while US residents now desire more foreign-made goods, thereby reducing net exports. This is equivalent to a reduction in the amount of real goods and services purchased in the US Secular deflation (220) A persistent decline in prices resulting from economic growth in the presence of stable aggregate demand Chapter 11 Say’s law A dictum of economist JB Say that supply creates its own demand. Producing goods and services generates the means and the willingness to purchase other goods and services. Money illusion Reacting to changes in money price rather than relative prices. If a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion. Keynesian short-run aggregate supply curve The horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy. Short-run aggregate supply curve The relationship between total planned economy wide production and the price level in the short run, if everything holds constant. If prices adjust completely in the short run, the curve is positively sloped. Aggregate demand shock Any event that causes the aggregate demand curve to shift inward or outward. Aggregate supply shock Any event that causes the aggregate supply 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 long-run aggregate supply curve. A recessionary gap happens when an economy is falling into a recession, which is defined as a lower real level of income (as measured by real GDP) then the full-employment level. An economic recession can happen in a number of ways, including a higher nominal
ECO201 Terminology exchange rate, which will reduce net exports and domestic income, and a large reduction in consumer expenditure or investment due to a decrease in take home pay by workers.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture