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Dynamic AD-AS Model: Monetary Policy definitions

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  • Dynamic ADAS Model
    A framework showing simultaneous shifts in aggregate demand, short run aggregate supply, and long run aggregate supply over time.
  • Monetary Policy
    Central bank actions that adjust the money supply to influence interest rates and aggregate demand.
  • Expansionary Monetary Policy
    A strategy involving lower interest rates to stimulate spending and boost aggregate demand during recessions.
  • Contractionary Monetary Policy
    A strategy involving higher interest rates to reduce spending and slow aggregate demand during inflationary periods.
  • Aggregate Demand
    The total spending on goods and services in an economy at various price levels.
  • Short Run Aggregate Supply
    The total output firms are willing to produce at different price levels in the short term.
  • Long Run Aggregate Supply
    The economy’s potential output when all resources are fully employed and prices are flexible.
  • Interest Rates
    The cost of borrowing money, which influences consumer and business spending decisions.
  • Potential GDP
    The highest level of output an economy can sustain without causing inflation.
  • Equilibrium
    A state where aggregate demand equals aggregate supply, resulting in stable prices and output.
  • Recession
    A period when actual output falls below potential GDP, often requiring policy intervention.
  • Inflation
    A general rise in price levels, often occurring when aggregate demand exceeds potential output.
  • Money Supply
    The total amount of monetary assets available in an economy, controlled by the central bank.
  • Investment Spending
    Expenditures by firms on capital goods, influenced by changes in interest rates.
  • Price Level
    An index reflecting the average prices of goods and services in an economy.