AP Macroeconomics Unit 3 vocab

Keynesian Economics

* macroeconomic generalization
* led to the conclusion that a capitalistic economy is characterized by macroeconomic instability
* says that fiscal and monetary policy can be used to promote full employment, price level stability, and economic growth

consumption schedule

a schedule showing the amounts households will spend at different levels of disposable income

saving schedule

a schedule showing the amounts households will save at different levels of disposable income

marginal propensity to consume (MPC)

the fraction of any change in disposable income spent for consumer goods

equal to the change in consumption divided by the change in disposable income

marginal propensity to save (MPS)

the fraction of any change in disposable income not spent for consumer goods (in other words: saved)

equal to the change in savings divided by the change in disposable income

investment demand curve (loanable funds market)

a curve that shows the amount of investment (loanable funds) demanded by an economy at a series of real interest rates

equilibrium GDP

the point at which aggregate supply equals aggregate demand

planned investment

the amount that a firm plans or intends to invest

impacted by interest rates

actual investment

the amount that a firm does invest

equal to planned investment + unplanned investment

spending multiplier

the number by which a change in any component of aggregate demand must be multiplied to find the resulting changes in the equilibrium GDP

calculated as 1/MPS or 1/(1-MPC)

net exports

exports - imports

aggregate demand

a schedule or curve, which shows the total quantity of goods and services demanded (purchased) at different price levels

wealth effect (real balances effect)

the tendency for increases in the price level to lower the real value or purchasing power of consumer assets, effecting a reduction in consumer spending

a fall in aggregate price level increases the purchasing power, so consumption increases

discretionary fiscal policy

deliberate changes in taxes (tax rates) and government spending by congress to promote full employment, price stability, and economic growth

expansionary fiscal policy

* an increase in government expenditures for goods and services
* a decreases in net taxes
* or a combination of the two

for the purpose of increasing aggregate demand and expanding real output to stabilize economy

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contractionary fiscal policy

* a decrease in government expenditures for goods and services
* an increase in net taxes
* or a combination of the two

for the purpose of reducing inflation

budget defecit

amount by which the government’s expenditures exceed its revenues (mostly taxes) each fiscal year

cyclical defecit

budget deficit that is caused by recession conditions bringing in lower tax revenues

budget surplus

amount by which government revenues (mostly taxes) exceed its expenditures each fiscal year

built in / automatic stabilizer

a mechanism that:

* increases deficit or reduces surplus during a recession
* decreases deficit or increases surplus during during an expansionary period

WITHOUT action from fiscal policymakers

ex. tax system: the more money we make a society, the more the government’s revenues increase

progressive tax system

system of taxation where the average tax rate of an individual raises as their income increases

proportional tax system

system of taxation where the average tax rate of an individual remains constant as their income rises or falls

regressive tax system

system of taxation where the average tax rate of an individual falls as their income rises or vice versa

net export effect

the idea that the impact of the change in fiscal or monetary policy will be strengthened or weakened by the subsequent change in net exports

supply-side fiscal policy

fiscal policy emphasizing control of the aggregate supply curve through changes in production costs

interest rate effect

the tendency for increases in the price level to increase the demand for money, raise interest rates, and as a result, reduce total spending in the economy

(opposite is true for decreases in price level)

foreign purchases effect

the inverse relationship between the net exports of an economy, and its price level relative to foreign price levels.

* if our PL decreases, AD increases
* if our PL increases, AD decreases

determinants of aggregate demand

factors which include:

* input prices
* productivity
* the legal-institutional environment
* nominal wages

that can shift the aggregate supply curve when they change

productivity

* a measure of average output, or of real output per unit of input

ex. productivity of labor may be found by dividing the real output by the hours of work

equilibrium price level

the price level at which the aggregate demand curve intersects the aggregate supply curve

equilibrium GDP

the real domestic output at which the aggregate demand curve intersects the aggregate supply curve

the GDP at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (real domestic output)

tax multiplier

= - MPC / MPS

because income is reduced by saving any new income or changes in taxes or transfers, we cannot use the spending multiplier because it must be reduced by the amount saved

balanced budget multiplier

* measures the change in aggregate production caused by government taxation and spending changes.
* always equal to 1 because in a balanced budget, total anticipated revenues and total anticipated expenditures are equal.

sticky wages

refers to a situation in which employers are slow to change wage rates in the face of a surplus or a shortage of workers

capital inflow

net inflow of funds into a country

rate of return

the profit earned on a project expressed as a percentage of its cost

nominal wage

the dollar amount of the wage paid (not adjusted for inflation)

potential output (full-employment output)

the level of Real GDP the economy would produce if all prices, including nominal wages, were sticky and there there is only structural and frictional unemployment present

AD-AS model

a model in which the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations

supply shock

an event that shifts the short-run aggregate supply curve

* cause the quantity supplied to change rapidly
* ex. a natural disaster that disrupts the production process or supply chain

demand shock

an event that shifts the short-run aggregate demand curve

* an unexpected event that dramatically changes demand for a product/products
* ex. a global pandemic

stagflation

* the combination of inflation and falling aggregate output
* worst of both worlds
* caused by SRAS decrease

long-run macroeconomic equilibrium

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

recessionary gap

when aggregate output is below potential output

* point INSIDE LRAS or PPC

inflationary gap

when aggregate output is above potential output

* point outside LRAS or PPC

classical economics

belief that

* supply creates its own demand
* wages and prices are fully flexible
* an economy will always be at or move towards full employment output (on LRAS or PPC)

short-run phillips curve

graph that shows the negative relationship between the unemployment rate and inflation rate

* increase in unemployment = decrease in inflation (vice versa)
* decrease in unemployment = increase in inflation (vice versa)

long-run phillips curve

graph that shows that there is no relationship between the unemployment rate and the inflation rate

vertical line is equal to structural plus frictional unemployment