Unit 4- AP Econ

marginal product

change in total product/change in total quantity of labor 

marginal cost 

wage workers paid/marginal product of workers 

• Wealth Effect: When price levels fall, wealth buys more goods and services, so RGDP increases

• Interest Rate Effect: At higher price levels, nominal interest rates are higher, so investment decreases 

• Net Exports Effect: At higher price levels, foreign consumers purchase fewer of our goods, so net exports decrease 

Reasons for Downward Sloping Aggregate Demand Curve

• Consumer Spending 

• Gross Investment

• Government Purchases

• Net Exports 

AD Shifters 

Interest Rate Effect

• At higher price levels, nominal interest rates are higher, so investment decreases 

MPS (Marginal Propensity to Save)

Change in Savings/Change in Income

MPC (Marginal Propensity to Consume)

Change in Consumption/Change in Income

Spending Multiplier Formula

1/(1-MPC) or 1/MPS

Tax Multiplier Formula

-MPC/MPS or -MPC/1-MPC

Suppliers have an incentive to bring more to market if the price level rises because they can get more for their finished products while wages remain unchanged.

Why is SRAS upward sloping?

• A change in the amount of resources in the economy

• Changes in production technology

• Changes in expected future prices

• Changes in the prices of land, labor, or capital

SRAS Shifters 

• Quantity of Resources

• Quality of Resources 

• Productivity 

• Technology 

LRAS Shifters

Inflationary Gap

current output > long run output

Recessionary Gap

current output < long run output

The amount supplied in the long run is not affected by the prices of final goods and services in the economy.

why is the lras curve vertical?

fiscal policy 

government tools that can be used to fight inflation or unemployment (taxes, gov. spending, transfer payments) 

monetary policy

set of tools used by a nation's central bank to manage the money supply and promote economic stability, primarily by influencing interest rates

expansionary fiscal policy

used for fighting recessions

• Increase Spending

• Decrease Taxes 

contractionary fiscal policy

Fight inflation by:

1. Decreasing government spending

2. Increasing Taxes

automatic stabilizers

built-in government spending and tax policies that automatically help stabilize the economy without new legislative action

discretionary fiscal policy

intentional government policies to increase or decrease government spending or taxation

Demand pull inflation

total demand for goods and services (i.e. 'aggregate demand') increases to exceed the supply of goods and services (i.e. 'aggregate supply') that can be sustainably produced.

cost push inflation

overall prices rise (inflation) due to increases in production costs such as wages and raw materials.

potential output

what can be produced if the economy were operating at maximum sustainable employment, where unemployment is at its natural rate; located in LRAS

shifts due to changes in factors other than current income, such as changes in wealth, consumer expectations, and the price level

When does the aggregate consumption function shift

Consumption= Autonomous Consumption (not buying w/ income) + MPC * Disposable income

consumption function

stagflation 

an economic situation characterized by high inflation, slow economic growth (stagnation), and high unemployment

inventory investment 

change in the value of a business's unsold goods over a specific period.

federal reserve operations 

implementing monetary policy to achieve maximum employment and stable prices, using tools like open market operations (buying and selling government securities) to influence the federal funds rate. Other key operations include supervising and regulating financial institutions, providing liquidity to the banking system, and ensuring the safety and efficiency of payment systems.

Types of Lag

• Recognition Lag: The time it takes for economists to understand/see the problem.

• Legislative Lag/Decision Lag: The time it takes for bills to pass through the government/legislate

• Implementation Lag: Actual process takes some time too, the people take time to actually get the changes.