Aggregate Demand (AD)
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| Term | Definition |
|---|---|
| Aggregate Demand (AD) | |
| Total demand for all goods and services produced within an economy at various price levels. AD is made up of C + I + G + (X − M) and directly determines GDP. | |
| Aggregate Supply (AS) | |
| The total supply of all goods and services produced in an economy at various price levels. In the long run, AS becomes perfectly inelastic due to limited resources. | |
| Automatic Stabilizers | |
| Economic mechanisms already built into the economy that automatically adjust government spending or taxation to stabilize aggregate demand without new government decisions. | |
| Bank Deposit Money | |
| Money that exists as numbers in bank accounts rather than physical cash; makes up the majority of a country’s money supply. | |
| Bank of Canada | |
| Canada’s central bank, responsible for monetary policy, issuing currency, acting as banker to the government and chartered banks, and maintaining financial stability. | |
| Bank Rate | |
| The interest rate the Bank of Canada charges chartered banks; forms the top of the operating band. | |
| Bear Market | |
| A market situation where a large group of investors believe prices will fall, causing widespread selling that actually leads to falling prices. This is a self-fulfilling prophecy because share prices are based on demand, and mass selling reduces demand and price. | |
| Bonds | |
| A financial instrument where a business borrows money and agrees to repay the principal plus interest, without giving ownership to the bondholder. | |
| Brain Drain | |
| The movement of highly skilled workers, students, and professionals from one country to another, usually for higher wages and better opportunities. | |
| Branch Plant Economy | |
| An economy dominated by foreign-owned companies operating local branches rather than domestic headquarters. | |
| Bull Market | |
| A market situation where a large group of investors believe prices will rise, causing widespread buying that actually leads to rising prices. This is a self-fulfilling prophecy because share prices are based on demand, and mass buying increases demand and price. | |
| Business Cycle | |
| The recurring stages of economic expansion and contraction that all economies experience. Stages occur in the same order, but differ in intensity and duration. | |
| Capital Intensive / Factory System | |
| A production method that relies heavily on machinery and capital goods, resulting in lower costs but often lower quality. | |
| Closed Shop | |
| A workplace where only union members can be hired. | |
| COLA (Cost of Living Adjustment) | |
| An increase in wages that matches inflation to preserve purchasing power. | |
| Consumer Price Index (CPI) | |
| A weighted basket of over 600 goods and services used to calculate inflation. Weights are based on average household spending. | |
| Consumer Surplus | |
| The difference between what consumers are willing to pay for a good and what they actually pay. It explains why consumers usually gain value from market transactions. | |
| Contractionary Fiscal Policy | |
| Government policy that decreases aggregate demand by increasing taxes or decreasing government spending. | |
| Cyclical Deficit | |
| A government deficit that occurs as a result of expansionary fiscal policy during economic downturns. | |
| Deficit Budget | |
| A government budget where spending exceeds tax revenue. | |
| Deflation | |
| A sustained decrease in the general price level. | |
| Deregulation | |
| The government decision to remove regulations or sell publicly owned businesses. | |
| Demand | |
| The quantity of goods or services consumers are willing and able to purchase at various prices. | |
| Elasticity | |
| A measure of how responsive quantity demanded or supplied is to a change in price. Elasticity greater than 1 is elastic, less than 1 is inelastic, and equal to 1 is unitary. | |
| Equilibrium | |
| The point where quantity demanded equals quantity supplied. This is the price the market naturally returns to if disrupted. | |
| Expansionary Fiscal Policy | |
| Government policy aimed at increasing aggregate demand through increased spending or reduced taxes. | |
| Externalities | |
| Costs or benefits affecting third parties who are not part of a transaction. These are also known as social or third-party costs. | |
| Fiat Money | |
| Money declared legal tender by the government with value not backed by physical commodities. | |
| Fiscal Policy | |
| Government use of taxation and spending to influence aggregate demand and economic conditions. | |
| Full Employment | |
| The lowest unemployment rate an economy can sustain, excluding frictional and structural unemployment. | |
| GDP (Gross Domestic Product) | |
| The total value of all final goods and services produced within a country in one year. GDP is linked to standard of living and economic growth but has limitations. | |
| Genuine Progress Indicator (GPI) | |
| An alternative to GDP that accounts for social and environmental costs. | |
| Holding Company | |
| A company that owns controlling shares in other companies but produces no goods or services itself. | |
| Human Capital | |
| The skills, education, training, and abilities possessed by workers. | |
| Hyperinflation | |
| Extremely rapid and uncontrolled inflation. | |
| Income Effect | |
| The change in quantity demanded caused by a change in consumers’ purchasing power due to price changes. | |
| Inflation | |
| A sustained increase in the general price level measured by CPI. Moderate inflation is desirable, but high inflation reduces purchasing power. | |
| Labour Force | |
| People who are employed or actively seeking employment. | |
| Law of Demand | |
| An inverse relationship between price and quantity demanded, ceteris paribus. This occurs due to the substitution effect and income effect. | |
| Law of Supply | |
| A direct relationship between price and quantity supplied, ceteris paribus. Higher prices motivate producers to supply more to increase profit. | |
| Marginal Cost (MC) | |
| The additional cost of producing one more unit of output. | |
| Marginal Revenue (MR) | |
| The additional revenue earned from selling one more unit of output. | |
| Marginal Utility (MU) | |
| The additional satisfaction gained from consuming one more unit of a good or service. MU decreases with each additional unit consumed, known as the law of diminishing marginal utility. | |
| Monetary Policy | |
| Government control of the money supply and interest rates to influence GDP, unemployment, and inflation. Executed through changes in interest rates. | |
| Monopoly | |
| A market structure with a single producer and no close substitutes. | |
| Natural Monopoly | |
| A monopoly allowed by government due to high infrastructure costs or efficiency reasons. | |
| Non‑Price Factors | |
| Factors other than price that cause shifts in demand or supply curves. | |
| Okun’s Law | |
| The inverse relationship between unemployment and GDP. For every 1% increase in unemployment, GDP falls by approximately 2%, and vice versa. | |
| Oligopoly | |
| A market structure dominated by a small number of large firms. | |
| Operating Band | |
| The range around the overnight rate target within which interest rates fluctuate. | |
| Overnight Rate Target (ORT) | |
| The interest rate set by the Bank of Canada to guide monetary policy. | |
| Paradox of Value | |
| The concept explaining why necessities are cheap while luxuries are expensive based on marginal utility. | |
| Perfect Competition | |
| A market structure with many sellers, identical products, and no market power. | |
| Price Ceiling | |
| A government-imposed maximum price intended to help consumers. Causes shortages, long lineups, black markets, and reduced quality. | |
| Price Floor | |
| A government-imposed minimum price intended to help producers. Causes surpluses and higher prices for consumers. | |
| Privatization | |
| The sale of government‑owned businesses to the private sector. | |
| Productivity | |
| Output per worker. | |
| Real GDP | |
| GDP adjusted for inflation. | |
| Recessionary Gap | |
| Occurs when aggregate demand is below full employment output. GDP is low, unemployment is high, and expansionary policy is required. | |
| Reserve Ratio | |
| The percentage of deposits banks must keep as reserves. | |
| Shares | |
| Units of ownership in a corporation. | |
| Structural Unemployment | |
| Unemployment caused by changes in technology or relocation of industries. | |
| Subsidies | |
| Government payments to businesses to lower costs or stabilize prices. | |
| Substitution Effect | |
| The tendency of consumers to replace expensive goods with cheaper alternatives. | |
| Supply | |
| The quantity of goods or services producers are willing to sell at various prices. | |
| Surplus Budget | |
| A government budget where tax revenue exceeds spending. | |
| Unemployment Rate | |
| The percentage of the labour force that is unemployed. | |
| Utility | |
| The satisfaction gained from consuming goods and services. | |
| Vertical Integration | |
| When a firm acquires businesses at different stages of production. | |
| Wage Rate | |
| The price of labour determined by labour demand and supply. | |
| Welfare State | |
| A system where the government plays a significant role in ensuring economic well-being through healthcare, social services, and income support. Reduces inequality but may reduce incentives to work. |