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Dynamic AD-AS Model: Monetary Policy definitions

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  • Monetary Policy
    Central bank actions that adjust money supply to influence interest rates and aggregate demand, aiming to stabilize economic output and price levels.
  • Aggregate Demand
    Total spending on goods and services in an economy, affected by interest rates and monetary policy, shifting to restore equilibrium.
  • Aggregate Supply
    Total output produced by firms, represented by both short-run and long-run curves, shifting as the economy grows.
  • Long Run Aggregate Supply
    Represents potential GDP, shifting right as the economy expands, marking the full employment output level.
  • Short Run Aggregate Supply
    Shows current production capacity, shifting right with economic growth, but can diverge from long-run equilibrium.
  • Expansionary Policy
    Strategy involving lower interest rates and increased money supply to boost spending and investment during recession.
  • Contractionary Policy
    Approach using higher interest rates to reduce spending and investment, controlling inflation when output exceeds potential.
  • Interest Rate
    Cost of borrowing money, manipulated by central banks to influence investment, consumption, and aggregate demand.
  • Money Supply
    Total amount of currency and deposits available, adjusted by the central bank to affect economic activity and price levels.
  • Potential GDP
    Maximum sustainable output an economy can achieve without causing inflation, guiding policy decisions.
  • Equilibrium
    Point where aggregate demand and aggregate supply intersect, determining stable price level and real GDP.
  • Price Level
    Average of current prices for goods and services, influenced by shifts in aggregate demand and supply.
  • Recession
    Period when output falls below potential GDP, prompting expansionary monetary policy to restore equilibrium.
  • Inflation
    Rise in overall price levels, often resulting from excessive aggregate demand, managed by contractionary policy.
  • Investment
    Spending by firms on capital goods, sensitive to interest rates and a key driver of aggregate demand changes.