Unir 3: National Income and Price Determination

disposable income

disposable income

Income remaining for a person to spend or save after all taxes have been paid

savings

Disposable income not spent for consumer goods.

Dissaving

occurs when people withdraw funds from their previously accumulated savings

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

Marginal Propensity to Save (MPS)

the increase in household savings when disposable income rises by $1

Aggregate Demand

total amount of goods and services being demanded

Aggregate demand increase

Increase in income, wealth, confidence, government spending, and net exports, Decrease in income tax, interest rates, and business taxes

Aggregate demand decrease

Increase in income taxes, business taxes, and interest rates, Decrease in income, wealth, confidence, government spending, and net exports

determinants of aggregate demand

Factors such as consumption spending, investment, government spending, and net exports

Aggregate Supply

the total amount supplied in the economy available at all possible price levels

Short Run Aggregate Supply

Current production

Long Run Aggregate Supply (LRAS)

intersects the horizontal axis at the full employment or potential level of output.

determinants of aggregate supply

resource prices, productivity, and the legal/institutional environment

SRAS increase

Increase in human capital and physical capital, Decrease in resource price and business taxes

SRAS decrease

Increase in resource prices, and business taxes, Decrease in human capital and physical capital

short run equilibrium

the price level and real GDP that occur when the aggregate demand curve intersects the short-run aggregate supply curve

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

Reccessionary Gap

When the economy is producing at less than the potential output.

Inflationary Gap

when aggregate output is above potential output

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift

demand shock

an event that shifts the aggregate demand curve

business cycle

Alternating periods of economic expansion and economic recession

Expansion

A period of economic growth as measured by a rise in real GDP

peak

the height of an economic expansion, when real GDP stops rising

contraction

a period of economic decline marked by falling real GDP

Trough

lowest point of the business cycle. Recession is leveling off and real GDP is no longer decreasing.

Recession

a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

expansionary fiscal policy

The gov.s way to manage a recession

-Decrease in taxes

-Increase in gov. spending

-Increase in gov. transaction

contractionary fiscal policy

Fiscal policy used to control growth (inflation)

-raise taxes

-cut gov. spending

-cut gov. transfers

1/MPS

Spending Multiplier

Tax Multiplier

MPC/MPS

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)