Income remaining for a person to spend or save after all taxes have been paid
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savings
Disposable income not spent for consumer goods.
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Dissaving
occurs when people withdraw funds from their previously accumulated savings
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Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
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Marginal Propensity to Save (MPS)
the increase in household savings when disposable income rises by $1
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Aggregate Demand
total amount of goods and services being demanded
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Aggregate demand increase
__**Increase**__ in income, wealth, confidence, government spending, and net exports, __**Decrease**__ in income tax, interest rates, and business taxes
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Aggregate demand decrease
__**Increase**__ in income taxes, business taxes, and interest rates, __**Decrease**__ in income, wealth, confidence, government spending, and net exports
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determinants of aggregate demand
Factors such as consumption spending, investment, government spending, and net exports
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Aggregate Supply
the total amount supplied in the economy available at all possible price levels
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Short Run Aggregate Supply
Current production
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Long Run Aggregate Supply (LRAS)
intersects the horizontal axis at the full employment or potential level of output.
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determinants of aggregate supply
resource prices, productivity, and the legal/institutional environment
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SRAS increase
__**Increase**__ in human capital and physical capital, __**Decrease**__ in resource price and business taxes
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SRAS decrease
__**Increase**__ in resource prices, and business taxes, __**Decrease**__ in human capital and physical capital
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short run equilibrium
the price level and real GDP that occur when the aggregate demand curve intersects the short-run aggregate supply curve
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long run equilibrium
the price level and real GDP that occurs when (1) the actual price level equals the expected price level, (2) real GDP supplied equals potential output, and (3) real GDP supplied equals real GDP demanded
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Reccessionary Gap
When the economy is producing at less than the potential output.
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Inflationary Gap
when aggregate output is above potential output
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supply shock
An unexpected event that causes the short-run aggregate supply curve to shift
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demand shock
an event that shifts the aggregate demand curve
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business cycle
Alternating periods of economic expansion and economic recession
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Expansion
A period of economic growth as measured by a rise in real GDP
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peak
the height of an economic expansion, when real GDP stops rising
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contraction
a period of economic decline marked by falling real GDP
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Trough
lowest point of the business cycle. Recession is leveling off and real GDP is no longer decreasing.
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Recession
a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP
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fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
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expansionary fiscal policy
The gov.s way to manage a recession
\-Decrease in taxes
\-Increase in gov. spending
\-Increase in gov. transaction
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contractionary fiscal policy
Fiscal policy used to control growth (inflation)
\-raise taxes
\-cut gov. spending
\-cut gov. transfers
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1/MPS
Spending Multiplier
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Tax Multiplier
MPC/MPS
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automatic stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. (unemployment stabilizers, welfare, progressive income taxes)
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