AP Macroeconomics - Unit 3

What does the graph for aggregate supply and demand use for their axises

Real GDP on x-axis: Total production of an economy

Weighted Average of prices on y-axis: General prices of goods in an economy

Why is aggregate demand downward sloping?

Wealth effect: Since only prices decrease (ceterus paribus) people can buy more stuff with decreased prices

Savings / Interest Rate Effect: People can save more with price decreases. This increase in savings leads to more lending, dropping interest rates and leading to more spending & investment

Foreign exchange effect: Lower interest rates leads to exchanging domestic currency. This weakens the dollar, but incentivizes foreign consumption, which increases GDP

What causes aggregate demand to shift?

Changes in consumption, investment, government spening, and net exports (Y = C+I+G+NX)

Fiscal Policy

Use of govenrment action (spending, transfers and taxes) to affect real GDP

Monetary Policy

Use of money supply to impact interest rates, which affects real GDP

Marginal Propensity to Consume (MPC)

The percent an agent is willing to spend of newly aquired money

Multiplier effect

How much does an individual dollar in spending increase real GDP based on MPC

Expenditure multiplier

The ratio of real GDP changes due to aggregate spending (1/(1-MPC), think about how money is exchanged when money is given)

Tax multiplier

The ratio of real GDP changes due to tax changes (-MPC/MPS, think about what happens when taxation is introoduced)

Change in autonomous spending

Spending not caused by an increase in income

What causes shifts in short-run aggregate supply

Changes in resources, government actions, expected price levels, and technology

Captial Stock

Amount of physical capital used to produce goods and services

Supply shock

Unexpected changes in availablity of key resources, causing a shift in short-run aggregate supply

What does a long run aggregate supply curve represent

Economic reactions to changes in prices of goods that lead to real GDP eventually maintaining a constant value