Category: Macroeconomics

Inflation is a highly controversial topic because many people consider it to be a severe economic problem. After all, nobody wants their money to lose purchasing power. However, depending on the situation and type of inflation, an increase in the overall price level does not always reduce people’s real purchasing […]

According to classical macroeconomic theory, the aggregate supply curve is perfectly vertical in the long run. However, in the short term (i.e., over a period of one or two years), it is upward sloping. That means a decrease in the overall price level results in a lower quantity of goods […]

Aggregate Supply (AS) describes the total amount of goods and services sellers are willing to sell within a particular market. According to classical macroeconomic theory, the aggregate supply curve is perfectly vertical in the long run, although it may slope upward in the short term. That means, over the long […]

Aggregate demand (AD) describes the total amount of goods and services buyers are willing and able to purchase within a particular market. In most cases, a fall in the price level increases the overall quantity of goods and services demanded (which is why the aggregate demand curve slopes down). However, other […]

To understand why the aggregate demand curve is downward sloping, we have to look at the relationship between the price level and the components of GDP (see also how to calculate GDP). More specifically, we have to analyze how the price level affects the quantity of goods and services demanded […]

Economic activity fluctuates over time. That means, while most economies experience growth in the long run, there may be years where this growth slows down or doesn’t happen at all. Although governments try their best to prevent economic downturns, these fluctuations cannot be entirely avoided. They occur in all countries […]

Economic productivity is a crucial determinant of living standards. That’s why some countries have a much higher standard of living than others. Thus, to understand why certain economies are more productive than others, we have to understand how productivity is determined. More specifically, there are four determinants of productivity: physical […]

The income tax rate defines what share of a person’s income has to be paid in taxes. However, depending on the tax system, the tax rate may change as the level of income increases or decreases. That means people may have to pay a larger or smaller part of their […]

One of the main tasks of central banks is controlling the money supply in the economy. However, because of fractional reserve banking, most of the currency in circulation is actually created by commercial banks. Therefore, central banks can only control the amount of money in the economy indirectly through what […]

The Malthusian theory of population examines the relationship between population growth and food supply. It states that the population grows exponentially while its food supply only grows at a linear rate. That eventually causes the population to outgrow its food supply, which leads to a Malthusian crisis (unlike the Cornucopian […]