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LIMITED RESOURCES: Finite quantities of labor, capital, land, and entrepreneurship available to an economy for the production of goods and services. This is one half of the fundamental problem of scarcity that has plagued humanity since the beginning of time. The other half of the scarcity problem is unlimited wants and needs.

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Lesson 15: Aggregate Market | Unit 4: Self Correction Page: 18 of 22

Topic: Inflationary Gap <=PAGE BACK | PAGE NEXT=>

The aggregate market can automatically reach long-run equilibrium by closing an inflationary gap.

Key points:

  • Short-run equilibrium is at the intersection of the AD and the SRAS (SRo) curves.
  • The initial short-run price level is Po, and real production is Qo.
  • Short-run equilibrium is to the right of the full employment production, Qf.
  • We have an inflationary gap.
  • As wages rise, production cost increases which decreases short-run aggregate supply.
  • The SRAS curves shift to reach the full employment level at the intersection of the LRAS and AD curves.

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PHYSICAL WEALTH, AGGREGATE DEMAND DETERMINANT

One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and that shifts the aggregate demand curve when it changes. An increase in the physical wealth causes a decrease (leftward shift) of the aggregate curve. A decrease in the physical wealth causes an increase (rightward shift) of the aggregate curve. Other notable aggregate demand determinants include interest rates, federal deficit, inflationary expectations, and the money supply.

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Today, you are likely to spend a great deal of time looking for the new strip mall out on the highway wanting to buy either a graduation present for your niece or nephew or a toaster oven that has convection cooking. Be on the lookout for attractive cable television service repair people.
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In the Middle Ages, pepper was used for bartering, and it was often more valuable and stable in value than gold.
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