AP Macroeconomics Unit 3 Vocab

Aggregate demand

The total demand for all goods and services in an economy at different price levels, represented by the sum of consumption, investment, government spending, and net exports.

Disposable income

The amount of money households have left after paying taxes and receiving government transfers, available for spending or saving.

Marginal propensity to consume (MPC)

The fraction of any additional income that a household will spend on consumption rather than saving.

Marginal propensity to save (MPS)

The fraction of any additional income that a household will save rather than consume; the sum of MPC and MPS equals 1.

Multiplier effect

The process by which an initial change in spending leads to a larger overall change in economic output due to increased consumption and production.

Spending multiplier

The ratio of change in real GDP to an initial change in spending; a higher MPC leads to a higher spending multiplier.

Tax multiplier

The ratio of the change in GDP resulting from an initial change in taxes; tax cuts increase disposable income and consumption.

Short-run aggregate supply (SRAS)

The total quantity of goods and services that producers are willing and able to supply at different price levels in the short run.

“Sticky” wages

Wages that are slow to adjust to changes in market conditions, remaining constant despite economic changes.

Long-run aggregate supply (LRAS)

The total quantity of goods and services that an economy can produce when all resources are fully employed.

Full employment

A situation where all available labor resources are being used efficiently, with no cyclical unemployment.

Demand-pull inflation

Inflation that occurs when aggregate demand outpaces aggregate supply, causing prices to rise.

Cost-push inflation

Inflation resulting from increased production costs, leading businesses to raise prices to maintain profit margins.

Expansionary policy

A type of fiscal or monetary policy aimed at stimulating economic activity, such as increasing government spending or cutting taxes.

Contractionary policy

A type of fiscal or monetary policy aimed at reducing inflation or slowing down an overheated economy by decreasing government spending.