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AGGREGATE DEMAND CURVE: A graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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Lesson 12: Business Cycles | Unit 2: A Simple Cycle Page: 7 of 26

Topic: Contraction <=PAGE BACK | PAGE NEXT=>

Contractions generally last about a year, but some have persisted for 1 1/2 years and some end after six months.
  • A contraction, also termed recession, is the decline of real GDP, from A to B.
  • A contraction is officially designated as at least six months of declining economic activity.
  • The 1930s Great Depression had two contractions, one lasting 43 months.
  • A contraction takes the economy from above the long-run trend to below the long-run trend. The long-run trend is full-employment production.
  • Below the long-run trend resources are not fully employed, unemployment increases.

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PRICE LEVEL

The average of the prices of goods and services produced in the aggregate economy. In a theoretical sense, the price level is the price of aggregate production. In a practical sense, the price level is commonly measured by either of two price indexes, the Consumer Price Index (CPI) or the GDP price deflator. The CPI is the price index widely publicized in the media and used by the general public. The GDP price deflator, in contrast, is less well-known, but is usually the price index of choice among economists. The inflation rate is calculated as the percentage change in the price level.

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Today, you are likely to spend a great deal of time looking for a downtown retail store wanting to buy either storage boxes for your family photos or a large, stuffed giraffe. Be on the lookout for the happiest person in the room.
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Francis Bacon (1561-1626), a champion of the scientific method, died when he caught a severe cold while attempting to preserve a chicken by filling it with snow.
"You can't build a reputation on what you are going to do."

-- Henry Ford, automaker

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