Unit 3 Fiscal Policy - AP Macroeconomics Flashcards

Fiscal Policy

Aggregate Demand (AD)

Total spending on goods and services in an economy.

Aggregate Supply (AS)

Total production of goods and services in an economy.

Short-Run Aggregate Supply (SRAS)

AS when prices and wages are sticky.

Long-Run Aggregate Supply (LRAS)

AS when all prices and wages are flexible.

Potential Output (Full Employment Output)

The maximum sustainable output at full employment.

Recessionary Gap

When actual output is below potential output.

Inflationary Gap

When actual output is above potential output, causing inflation.

Short-Run Equilibrium

When AD and SRAS intersect, determining price and output.

Long-Run Equilibrium

When AD, SRAS, and LRAS intersect, meaning no output gap.

Phillips Curve

A graph showing the trade-off between inflation and unemployment.

Fiscal Policy

Government spending and taxation policies to influence the economy.

Monetary Policy

Central bank actions controlling money supply and interest rates.

Multiplier Effect

When one person’s paycheck is another person’s income.

Marginal Propensity to Consume (MPC)

The fraction of extra income spent.

Marginal Propensity to Save (MPS)

The fraction of extra income saved.

AD-AS Model

A framework showing how AD and AS determine economic conditions.

Supply-Side Economics (Say’s Law)

The idea that supply creates its own demand.

Keynesian Economics

The theory that government intervention can stabilize the economy.

Inflation

A general increase in prices over time.

Deflation

A general decrease in prices over time.

Stagflation

A period of slow growth, high unemployment, and high inflation.

LRAS Curve

A vertical line representing full employment output.

Shifts in Aggregate Demand (AD)

Caused by changes in C, I, G, or NX.

Shifts in Aggregate Supply (AS)

Caused by changes in resources, productivity, or costs.

Investment (I)

Business spending on capital goods.

Consumption (C)

Household spending on goods and services.

Government Spending (G)

Total government expenditures on goods and services.

Net Exports (NX)

Exports minus imports in an economy.

Equilibrium Price Level

The price level where AD equals AS.

Equilibrium Output

The GDP level where AD equals AS.

Real GDP

GDP adjusted for inflation, showing true economic output.

Nominal GDP

GDP measured in current prices, not adjusted for inflation.

Short-Run Macroeconomic Equilibrium

When AD and SRAS determine output and prices.

Long-Run Macroeconomic Equilibrium

When AD, SRAS, and LRAS align, closing output gaps.

Full Employment

When all available resources are being used efficiently.

Natural Rate of Unemployment

The unemployment rate when the economy is at full employment.

Automatic Stabilizers

Government & Economic policies that adjust without government action, helping to moderate the business cycle.

Discretionary Fiscal Policy

Government action to change spending or taxes to influence the economy.

Business Cycle

The natural rise and fall of economic growth over time.