AP Economics Chapter 29 Vocabulary

aggregate demand-aggregate supply model: The macroeconomic model that uses

aggregate demand and aggregate supply to determine and explain the price level and the
real domestic output.
aggregate demand: A schedule or curve that shows the total quantity of goods and
services demanded at different price levels.
real-balance effect: The tendency for increases in the price level to lower the real value
(or purchasing power) of financial assets with fixed money value and, as a result, to
reduce total spending and real output, and conversely for decreases in the price level.
interest rate effect: The tendency for increases in the price level to increase the demand
for money, raise interest rates, and, as a result, reduce total spending and real output in
the economy (and the reverse for price-level decreases).
foreign purchase effect: The inverse relationship between the net exports of an economy
and its price level relative to foreign price levels.
determinants of aggregate demand: Factors such as consumption spending, investment,
government spending, and net exports that, if they change, shift the aggregate demand
curve.
aggregate supply: A schedule or curve showing the total quantity of goods and services
supplied (produced) at different price levels.
immediate short-run aggregate supply curve: An aggregate supply curve for which real
output, but not the price level, changes when the aggregate demand curves shifts; a
horizontal aggregate supply curve that implies an inflexible price level.
short run aggregate supply curve: An aggregate supply curve relevant to a time period in
which input prices (particularly nominal wages) do not change in response to changes in
the price level.
long run aggregate supply curve: The aggregate supply curve associated with a time
period in which input prices (especially nominal wages) are fully responsive to changes
in the price level.
determinants of aggregate supply: Factors such as input prices, productivity, and the
legal-institutional environment that, if they change, shift the aggregate supply curve.
productivity: A measure of average output or real output per unit of input. For example,
the productivity of labor is determined by dividing real output by hours of work.

equilibrium price level: The price level at which the aggregate demand curve intersects
the aggregate supply curve.
equilibrium real output: The gross domestic product at which the total quantity of final
goods and services purchased (aggregate expenditures) is equal to the total quantity of
final goods and services produced; the real domestic output at which the aggregate
demand curve intersects the aggregate supply curve.
menu costs: The reluctance of firms to cut prices during recessions because of the costs of
altering and communicating their price reductions; named after the cost associated with
printing new menus at restaurants.
efficiency wage: A wage that minimizes wage costs per unit of output by encouraging
greater effort or reducing turnover.