CHAPTER 9: Aggregate Demand

Aggregate Demand

The total quantity of output (real GDP) demanded at alternative price levels in a given time period

Aggregate Supply (AS)

The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period

Equilibrium (macro)

The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.

Consumption

Expenditure by consumers on final goods and services.

Disposable Income (DI)

After-tax income of households; personal income less personal taxes.

Saving

That part of disposable income not spent on current consumption; disposable income less consumption.

Average Propensity to Consume (APC)

Total consumption in a given period divided by total disposable income.

Marginal Propensity to Consume (MPC)

The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.

Marginal Propensity to Save (MPS)

The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 - MPC.

Wealth Effect

A change in consumer spending caused by a change in the value of owned assets.

Autonomous Consumption

Consumer spending not dependent on current income.

Consumption Function

A mathematical relationship indicating the rate of desired consumer spending at various income levels.

Dissaving

Consumption expenditure in excess of disposable income; a negative saving flow.

Investment

Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.

Full-Employment GDP

The value of total market output (real GDP) produced at full employment.

Equilibrium GDP

The value of total output (real GDP) produced at macro equilibrium (AS = AD).

Recessionary GDP Gap

The amount by which equilibrium GDP falls short of full-employment GDP.

Cyclical Unemployment

Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand.

Inflationary GDP Gap

The amount by which equilibrium GDP exceeds full-employment GDP.

Demand-Pull Inflation

An increase in the price level initiated by excessive aggregate demand.

Business Cycle

Alternating periods of economic growth and contraction.

Aggregate Expenditure

The rate of total expenditure desired at alternative levels of income.

Recessionary Gap

The amount by which aggregate spending at full employment falls short of full-employment output.

Expenditure Equilibrium

The rate of output at which desired spending equals the value of output.

Inflationary Gap

The amount by which aggregate spending at full employment exceeds full-employment output.