AP Macro Unit 3

AP Macro Unit 3

Spending Multiplier Formula

1/MPS

Tax Multiplier

-MPC/MPS

Aggregate Demand

Real GDP vs Price Level, downward sloping

Aggregate Demand Shifters

Consumer Spending, Gross Investment, Government Purchases, Next Exports

SRAS

Real GDP vs Price Level, upward sloping

SRAS shifters

Inverse of Wages, Productivity, Inflation Expectations, Business Taxes, Business Regulations

LRAS

Vertical line at full employment level of output.

LRAS Shifters

Quantity of resources, Quality of resources, Productivity, Technology

Short-run equilibrium

intersection of AD and SRAS

Equilibrium to the right of LRAS

Inflationary Gap (Low unemployment)

Equilibrium to the left of LRAS

Recessionary Gap (High Employment)

Stagflation cause

Huge demand shock

Expansionary Policy

Government intervention to heal recessionary gap via Gov spending or tax cuts to stimulate consumption

Contractionary Policy

Government intervention to heal inflationary gap via less gov spending or increasing taxs to stimulate consumption

SRPC Shifters

Right: Expectation of higher inflation, neg supply shocks (Natural Disaster)

Left: Expectation of higher inflation, pos supply shocks (Tech improvement)