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Real Business Cycle Model definitions

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  • Aggregate Supply
    Total output of goods and services available in an economy, influenced by technology and resource changes, central to explaining economic fluctuations.
  • Aggregate Demand
    Overall spending on goods and services in an economy, affected by production and employment levels, but less emphasized in this model.
  • Supply Shock
    Sudden event causing a change in resource availability or input prices, leading to shifts in production and employment.
  • Long Run Aggregate Supply
    Curve representing the economy’s maximum sustainable output, shifting due to technology or resource changes.
  • Equilibrium
    Point where aggregate supply and aggregate demand intersect, determining real GDP and price level in the economy.
  • Real GDP
    Measure of economic output adjusted for price changes, reflecting actual production levels after supply shocks.
  • Price Level
    Average of current prices across the entire economy, remaining constant during supply-driven recessions in this model.
  • Recession
    Period of reduced economic activity, often triggered by decreased aggregate supply from resource or technology changes.
  • Inflation
    General increase in prices, attributed in this model to supply-side factors rather than demand-side changes.
  • Resource Availability
    Access to inputs needed for production, with reductions causing shifts in aggregate supply and economic downturns.
  • Input Prices
    Costs of resources used by firms, with increases leading to lower production and employment.
  • Technology
    Advancements or changes affecting production efficiency, driving shifts in aggregate supply and economic output.
  • Employment
    Number of people working in the economy, declining when aggregate supply falls due to supply shocks.
  • Monetarist Model
    Economic framework emphasizing money supply’s role in influencing spending and aggregate demand, contrasting with supply focus.
  • Keynesian Model
    Economic theory prioritizing aggregate demand as the main driver of recessions and recovery, differing from supply-side explanations.