econ- unit 3

aggregate demand

aggregate demand

(downward) curve that shows what people buy.

high prices= people spend less. low prices= people spend more

real balances effect

when prices go down, spending increases

because purchasing power increases

interest rate effect

decline in prices decreases the demand for money

this decreases interest rates, and leads to an increase in spending

foreign purchases effect

when US price levels rise (relative to foreign prices), foreigners will buy less US goods and US people buy more foreign goods.

people buy from the country whose prices are lower

aggregate demand determinants

change in consumer spending (c)

changes in investment spending (Ig)

changes in government spending (G)

changes in net export spending (Xn)

multiplier

the impact from a change in spending.

a single change in spending has a larger impact than its original amount

multiplier formula

= (change in real GDP) / (initial change in spending)

types of multipliers

• expenditure / spending

• tax

expenditure/spending multiplier formula

1 / MPS

1 / (1-MPC)

MPS

marginal propensity to save

change in GDP formula

= multiplier * initial change in spending

tax multiplier formula

-(MPC / MPS)

disposable income is spent as either:

consumption or savings

APC formula

= C / DI

APS formula

= S / DI

disposable income formula

= (personal income) - (taxes)

MPC formula

= (change in consumption) / (change in DI)

MPS formula

= (change in saving) / (change in DI)

noneconomic determinants of consumtion and saving

wealth, borrowing, expectations, real interest rates

negative

tax multiplier is always ……

short run aggregate supply

when nominal wages and input prices are NOT responsive to price level changes

long run aggregate supply

when nominal wages and input prices ARE responsive to price level changes

short run aggregate supply determinants

input prices, productivity levels, government involvement

more GDP=

• more people working

• smaller unemployment

• not recession

yeah

is it good when

aggregate demand = aggregate supply

recessionary gap

making less than we should. bad

inflationary gap

making more than we should. bad

full output

where should everything intersect on the graph looks like this *