DSST Money & Banking Part 1

Aggregate demand curve consists of various quantities

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 Aggregate Demand Curve: consists of various quantities of  output persons want to buy at various price levels. Keynes effect:  The effect of a change in the price level changing the real money supply and aggregate demand  via interest rate adjustments. Short Run Aggregate Supply:  Aggregate Supply: The schedule of various amount of aggregate output that is  produced at various price levels.  Short run supply schedule depends on available technologies, amount of  capital, labor force, degree of competitiveness (price and wage flexibility). Aggregate Supply Curve:  will be a positively sloped curve which depends on: Productivity of Labor,  Markup Factor, expected rate of inflation, and the speed at which wages change in response to excess  demands or supplies of labor. Two assumptions about labor markets create the Phillips Curve:  1: Wages do not always adjust fast  enough to clear the labor markets, and 2: Expectations about inflation are fully incorporated into wages. Natural Rate of Unemployment (U N ):  The unemployment rate at which wage inflation does not tend to  accelerate or decelerate Sticky Wages:  Less than perfectly flexible wages such as labor contracts which fix wage rates for a  period. Sticky Prices:  prices that do not adjust sufficiently to cause the quantity demanded to equal the quantity  supplied. Full Employment / Natural Rate of Output (X N ):  The output level at which the labor market is in  equilibrium; labor demand = labor supply. Role of  Inflation Expectations Long run Equilibrium : the output level that is achieved when product, financial,  and labor markets are all in equilibrium.  Keynesian economists believe that this process of adjusting to the  long run equilibrium as a slow process that might take up to six years, whereas more classic economists  view it as a rapid process that might be completed in a year or so. Long Run Supply Curve (S LR ):  shows the price and output combinations achieved when all markets are  in equilibrium.  This long run supply curve is vertical Recession  A recession is traditionally defined in macroeconomics as a  decline in a country's real Gross Domestic  Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative  real economic growth). However this definition is not universally accepted. The National Bureau of Economic  Research defines a recession more ambiguously as "a significant decline in economic activity spread across the  economy, lasting more than a few months." A recession may involve simultaneous declines in coincident  measures of overall economic activity such as employment, investment, and corporate profits. Recessions may 
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