AP Macro Ch 27-30

What is disposable income?

income after taxes

Average Propensity to Consume (APC)

Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; c/disposable income

Average Propensity to Save (APS)

Fraction (or percentage) of disposable income that households save; s/disposable income

Marginal Propensity to Consume (MPC)

amount that is consumed after a change in income; change in consumption/change in income

Marginal Propensity to Save (MPS)

amount that is saved after a change in income; change in savings/change in income

what are the noneconomic determinants of consumption and savings

wealth, borrowing, and expectations

What is the wealth effect?

The tendency for people to increase their consumption spending when the value of their financial and real assets rises (prices falls) and to decrease their consumption spending when the value of those assets falls (prices rise)

What is interest?

the fee for borrowing money

what is the expected rate of return?

what we expect to get back from an investment; profit/cost

What is the real interest rate?

the amount a lender stands to make; the nominal interest rate minus the inflation rate

what factors cause shifts in the investment demand curve?

business costs, business taxes, technological change, planned inventory, and expectations.

business costs

acquistion, maintenance, operating costs; as business costs rise investment demand decreases

Business Taxes

as business taxes rise investment demand decreases; tax on profits

expectations

if expectations are high investment demand will rise

What is the multiplier effect?

measures the impact from a change in spending; a single change in spending has a larger impact than its intial amount

how to calculate the multiplier

1/(1-MPC) or change in real gdp/intial change in spending

how to calculate the change in gdp using the multiplier

(multiplier)(change in spending)

what kind of relationship does the multiplier and the MPS have?

inverse; the more people consume i.e. the less they save the larger the multiplier

private closed economy

just consumption and investment

What is equilibrium GDP?

Aggregate expenditures = gdp

What is disequilibrium GDP?

Aggregate expenditures does not equal gdp

private open economy

cosumption, investment, and net exports

what do international economic linkages determine?

positive or negative net exports

Foreign Determinants of Net Exports

prosperity abroad, tariffs, and exchange rates (booming dollar = more imports)

What are injections?

unplanned money going in; investment, government spending, exports

What are leakages?

unplanned money going out; savings, taxes, imports

at equilibrium leakages and injections are

equal

What is aggregate demand?

schedule or curve tthat shows amounts of real output that buyers collectively desire to purchase at each possible price level

what is the relationship between demand and price level?

inverse; as prices rise demand falls

What is the real balances effect?

when price level falls purchasing power increases which increases spending

What is the interest rate effect?

a decline in prices decreases the demand for money lowering interest rates and thus increasing investment

what is the foreign purchases effect?

The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.

determinants of aggregate demand

changes in consumption spending, consumer wealth, consumer expectations, household indebtedness, taxes, changes in investment spending, interest rates, business taxes, government spending, changes in net exports.

What is aggregate supply?

scheudle or cuvre showing the level of real domestic output that firms will produce at each possible price level

What is the LRAS curve?

reference point for where we should operate; left less using and right too much

determinants of aggregate supply

input prices, productivity, technology, government involvement

what is the intermediate range on the AS curve

full employment and ideal equilibrium point

what does the horizontal range experience

the full power of the multiplier

what is expansionary fiscal policy

stimulates the economy; decrease in taxes and/or increase in government spending

what is contractionary fiscal policy

dlows down the economy; increase in taxes and/or a decrease in government spending

borrowing money vs new money

a way to finance deficits by borrowing from the public or selling securities (bonds, bills, and notes)

money creation

avoids the crowding out effect but is inflationary

What is the crowding out effect?

Government borrowing increases interest rates and decreases private investment

debt reduction vs idle surplus

debt reduction: extra money towards debt or impounding which removes money from circulation. This is anti-inflammatory.

what is progressive income tax?

the more you mkae the more you're taxed; boosts surpluses in inflationary perods and increases deficits during recessionary periods

What is a regressive tax?

the less you make the more you are taxed

what is proportional/flate rate tax?

everyone in taxed the same

What is recognition lag?

the time between the beginning of recession or inflation and the certain awareness that it is actually happening (must be 6 months of downturn to be recession)

what is administrative lag?

time it takes congress to figure out a solution to the problem

what is operational lag?

once implemented the time it takes for a solution to work

how do political considerations impact the economy?

politicans implement policies to make them look good but they hurt the economy

how does state and local government finance impact the economy?

local/state government does opposite of federal government

WHat do shocks from abroad cause?

reduced investments