Macro econ unit 3

Aggregate

Sum total; a collection of separate things mixed together.

Aggregate Demand (AD)

A schedule or curve that shows the total quantity demanded for all goods and services of a nation at various price levels in a given period of time.

Aggregate Supply

The total amount of goods and services that all firms in all the industries in a country will produce at various price levels in a given period of time.

Automatic Stabilizers

increase government spending and reduce tax revenue automatically when aggregate demand decreases. They reduce government spending and collect more in tax revenues when aggregate demand increases.

Transfer Payment

A payment made when no good or service is exchanged. Allowances are private transfer payments; social security checks are governmental transfer payments. Transfer payments are NOT included in GDP because they do NOT represent production.

Budget Deficit

When a government spends more than it collects in tax revenues in a given year. G \> T

Budget Surplus

When a government collects more in tax revenues than it spends in a given year. T \> G

Contractionary Fiscal Policy

A demand-side (AD) policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand. Could be used in a period of high demand-pull inflation to bring down the inflation rate. T up and/or G down

Cost-push inflation

Inflation resulting from a decrease in AS and accompanied by a decrease in real output and decreases in employment. Also referred to as "stagflation" or "adverse/negative aggregate supply shock."

Crowding-out Effect

The rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market. This occurs because of budget deficits, so the government must borrow money, which drives up real interest rates. The crowding-out effect is seen as a disadvantageous side effect of expansionary fiscal policy.

Demand-Pull Inflation

Inflation resulting from an increase in aggregate demand without a corresponding increase in aggregate supply. AD is increasing.

Economic Growth

An increase in the potential output of goods and services in a nation over time. PPC is shifting outward or could also be depicted as Long Run Aggregate Supply (LRAS) curve shifting to the right.

Expansionary Fiscal Policy

A demand-side (AD) policy whereby government decreases taxes or increases its expenditures in order to increase aggregate demand. Could be used in a period of high unemployment (recession) to increase national output (real GDP). T down, G up so AD increases.

Fiscal Policy

Changes in government spending (G) and tax collections (T) implemented by government with the aim of either increasing or decreasing aggregate demand to achieve the macroeconomic objectives of full employment and price-level stability.

Inflationary Gap

The difference between a nation's equilibrium level of output and its full employment level of output when the nation is overheating (producing beyond its full employment level).

Inflationary spiral

The rapid increase in average price level result from demand-pull inflation leading to higher wages, causing cost-push inflation.

Keynesian Economics

Economic theory based on the ideas of John Maynard Keynes, who argued that periods of low employment and output would not self-correct quickly and that government action to stimulate aggregate demand was useful in these times (i.e., engage in fiscal policy).

Long Run Aggregate Supply (LRAS)

The level of output to which an economy will always return in the long run. The LRAS curves intersects the horizontal axis at the full employment or potential level of output. "at the full-employment level of real GDP"

Long Run

The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to the flexibility of wages and prices and an economy will return to its full employment level of output. Sometimes referred to as the "flexible wage period."

Short Run Aggregate Supply (SRAS)

Positive relationship between the aggregate amount of GDP produced and the price level in an economy in the short run, when it is presumed that prices of goods are flexible but wage rates are fixed.

Marginal Propensity to Consume (MPC)

The fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income.

Marginal Propensity to Save (MPS)

The fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income.

Multiplier Effect

The increase in total spending in an economy resulting from an initial injection of new spending. The size of the multiplier effect depends upon the spending multiplier. An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

Spending multiplier

\= 1/(1-MPC) or 1/MPS. This tells you how much total spending an initial interjection of spending in the economy will generate. For example, if the MPC \= .8 and the government spends $100 million, then the total increase in spending in the economy \= $100 x 5 \= $500 million.

Phillips curve (long run)

A vertical curve at the natural rate of unemployment showing that in the long run there is no trade-off between the price level and the level of unemployment in an economy.

Phillips curve (short run)

A downward-sloping curve showing the short-run inverse relationship between the level of inflation and the level of unemployment.

Recessionary Gap

The difference between an economy's equilibrium level of output and its full employment level of output when an economy is below full-employment.

Self-correction

The idea that an economy producing at an equilibrium level of output that is below or above its full employment level will return on its own to it full employment level if left to its own devices. Requires fully flexible wages and prices and is associated with classical economic views.

Stagflation

A macroeconomic situation in which both inflation and unemployment increase. Caused by a negative supply shock (i.e., Aggregate Supply decreases).

Sticky wage and price model

The short-run Aggregate-Supply Curve is sometimes referred to as the "sticky wage and price model," because workers' wage demands take time to adjust to changes in the overall price level, and therefore, in the short-run an economy may produce well below or beyond its full employment level of output.

Supply Shock

Anything that leads to a sudden, unexpected change in aggregate supply. Can be negative (decreases in AS) or positive (increases in AS). May include a change in energy prices, wages, or business taxes, or may result from a natural disaster or a new discovery of important resources.

Real Balances Effect \= Wealth Effect

One of the reasons the aggregate demand curve slopes downward: The tendency for increases in price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output. The idea that any wealth that you may have in the form of a cushion or securities becomes less valuable as prices rises because higher prices reduce real spending power, prices and output are negatively related.

Interest Rate Effect

if the average price level rises, consumers and firms might need to borrow more money for spending and capital investment, which increases the interest rate and delays current consumption. Reduces current consumption of domestic products and the price level rises. One of the reasons why AD is downward sloping.

Foreign Trade Effect

When U.S. price level increases, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to decrease. One of the reasons why AD is downward sloping.

MPC + MPS \= 1

The fraction of an increase in disposable income that is spent (MPC) plus the fraction that is saved (MPS) must equal 1.