Unit 3: National Income and Price Determination (copy)

Macroeconomic equilibrium

- Occurs when the quantity of real output demanded is equal to the quantity of real output supplied.

Marginal propensity

to consume (MPC)- How much people consume rather than save when there is a change in income.

Supply shocks

- An economy- wide phenomenon that affects the costs of firms and the position of the SRAS curve, either positively or negatively.

price level

If the for output rises faster than the rising costs, producers have a profit incentive to increase production.

Technology

and productivity- Better raises the productivity of both capital and labor.

Multiplier effect

- The idea that an initial change in spending will set off a spending chain that is magnified in the economy.

Foreign sector

substitution effect- Goods and services produced in other nations.

Recessionary gap

- The amount by which full- employment GDP exceeds equilibrium GDP.

GDP

In other words, it measures how increases or decreases when the government increases or decreases spending in the economy.

Exchange rates

- Imports decrease when the between the dollar and foreign currency falls.

Deregulation

- When the regulation of industries restricts their ability to produce, the short- run AS likely increases.

Lags

and delays can sometimes occur with the discretionary fiscal policy.

Political

or environmental phenomena- For a nation as large as the United States, wars and natural disasters can decrease the short- run AS without permanently decreasing the level of full employment.

Equilibrium

can exist at, above, or below full employment.

Fiscal policy

- Deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level.

real GDP

If taxes are lowered, the multiplier is smaller so to have the same increase in , the amount of taxes cut has to be larger than an increase in government spending.

Contractionary fiscal policy

- When the economy operates beyond full employement, inflation becomes a problem, so the government might need to contract the economy.

general sources

Demand in the macroeconomy comes from four , which are used to calculate the real GDP.

effects of negative supply shocks

It is typically used to counter the or recessions.

Negative supply shocks

usually occur when economy- wide input prices suddenly increase.

Non discretionary fiscal policy

refers to permanent spending or taxation laws already on books that help regulate the economy.

expansionary fiscal policy

To resume, is the increases in government spending or lower net taxes meant to shift AD to the right.

Positive supply shocks

might be the result of higher productivity or lower energy prices.

positive relationship

The between the level of domestic output produced and the aggregate price level of that output.

AD curve

When the increases, an inflationary gap happens to cause an increase in real GDP to GDPi (lower unemployment rate) and an increase in the aggregate price level to PL2.

Interest rate

effect- Goods and services in the future.

input prices

In the macroeconomic long run, the have enough time to fully adjust to market forces.

Income taxes

and anti- poverty programs are examples of automatic stabilizers during an economic boom or recession.

Net Exports

(X- M)- When sales to foreign consumers are high and purchases from foreign producers are low, the increase.

sum of consumption

AD measures the spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)

Consumers

also increase their consumption if they are optimistic about the future.

Inflationary gap

- The amount by which equilibrium GDP exceeds full employment GDP.

Wealth effect

- Money and financial assets.

Aggregate demand

(AD)- The inverse relationship between all spending on domestic output and the aggregate price level of that output.

Marginal propensity

to save (MPS)- How much people save rather than consume when there is a change in income.

Fiscal policy

is typically designed to manipulate AD to "fix "the economy.

Expansionary fiscal policy

- Real GDP is low and unemploymentis high when the economy suffers a recession.

Marginal Propensity

to Save (MPS) is calculated by dividing the change in savings by dividing the change in disposable income.

Marginal Propensity

to Consume (MPC) is calculated by dividing the change in consumption by dividing the change in disposable income.

Aggregate demand (AD)

The inverse relationship between all spending on domestic output and the aggregate price level of that output

Foreign sector substitution effect

Goods and services produced in other nations

Consumer Spending (C)

If you put more money in the pockets of households, it is expected that they consume a great deal of it and save the rest

Investment Spending (I)

Firms increase investment if they believe the investment will be profitable

Government Spending (G)

The government injects money into the economy by spending more on goods and services, by reducing taxes, or by increasing transfer payments

Foreign incomes

Exports increase with strong foreign economies

Consumer tastes

If American blue jeans become more popular in France, American AD increases

Exchange rates

Imports decrease when the exchange rate between the dollar and foreign currency falls

Tax policy

Some taxes are aimed at producers rather than consumers

Macroeconomic equilibrium

Occurs when the quantity of real output demanded is equal to the quantity of real output supplied

Recessionary gap

The amount by which full-employment GDP exceeds equilibrium GDP

Inflationary gap

The amount by which equilibrium GDP exceeds full employment GDP

Fiscal policy

Deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level

Expansionary fiscal policy

Real GDP is low and unemploymentis high when the economy suffers a recession

Contractionary fiscal policy

When the economy operates beyond full employement, inflation becomes a problem, so the government might need to contract the economy

Sticky prices

If price levels do not change, especially downward, with changes in AD, then prices are thought of as sticky or inflexible