AP Macroeconomics - Unit 3 (Unit 4)

Marginal Propensity to Consume (MPC)

The fraction of an additional dollar of disposable income that is spent on consumption.

Marginal Propensity to Save (MPS)

The fraction of an additional dollar of disposable income that is saved rather than spent.

Autonomous Change in Aggregate Spending

An increase or decrease in aggregate spending that is independent of the level of real GDP.

Multiplier

The ratio of the total change in real GDP to the initial autonomous change in aggregate spending.

Consumption Function

The relationship between consumption spending and disposable income.

Autonomous Consumer Spending

The portion of consumption spending that does not depend on disposable income.

Aggregate Consumption Function

The total consumption of households at each level of disposable income in the economy.

Planned Investment Spending

Investment that firms intend to undertake during a given period.

Inventories

Stocks of goods held by firms to meet future sales.

Inventory Investment

The change in inventories over a period of time.

Unplanned Inventory Investment

Changes in inventory levels that occur when actual sales differ from expected sales.

Actual Investment Spending

The sum of planned investment spending and unplanned inventory investment.

Aggregate Demand Curve

A curve showing the total quantity of goods and services demanded at different price levels.

Wealth Effect of a Change in the Aggregate Price Level

The impact of price level changes on consumer spending via changes in the real value of wealth.

Interest Rate Effect of a Change in the Aggregate Price Level

The impact of price level changes on investment and consumption via changes in interest rates.

Fiscal Policy

Government policies regarding spending and taxation to influence aggregate demand.

Monetary Policy

Central bank actions affecting the money supply and interest rates to influence aggregate demand.

Aggregate Supply Curve

A curve showing the total quantity of goods and services that firms produce at different price levels.

Nominal Wage

The wage paid to workers in current dollars, not adjusted for inflation.

Sticky Wages

Wages that are slow to adjust to changes in economic conditions, leading to short-run fluctuations.

Short-Run Aggregate Supply (SRAS) Curve

A curve showing the relationship between the aggregate price level and the quantity of goods and services supplied in the short run.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve representing the economy’s potential output at full employment.

Potential Output (YP)

The level of output the economy produces when operating at full employment.

AD-AS Model

The aggregate demand–aggregate supply model used to analyze short- and long-run fluctuations in output and prices.

Short-Run Macroeconomic Equilibrium

Occurs when the quantity of aggregate output supplied equals the quantity of aggregate output demanded (AD intersects SRAS).

Short-Run Aggregate Price Level (PE)

The price level corresponding to short-run macroeconomic equilibrium.

Short-Run Equilibrium Aggregate Output (YE)

The quantity of real GDP produced at short-run macroeconomic equilibrium.

Demand Shock

An event that shifts the aggregate demand curve, such as changes in expectations, fiscal policy, or foreign demand.

Supply Shock

An event that shifts the short-run aggregate supply curve, such as changes in input prices or technology.

Stagflation

A period of falling output and rising prices, usually caused by a negative supply shock.

Long-Run Macroeconomic Equilibrium

Occurs when aggregate output equals potential output and the economy has fully adjusted to shocks.

Recessionary Gap

When real GDP is below potential output, associated with high unemployment.

Inflationary Gap

When real GDP exceeds potential output, associated with upward pressure on prices.

Output Gap

The difference between actual real GDP and potential output.

Self-Correcting

The economy’s natural tendency to return to potential output over time without government intervention.

Stabilization Policy

The use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

Social Insurance

Government programs designed to protect families against economic hardship, such as Social Security, Medicare, and Medicaid.

Expansionary Fiscal Policy

Government actions that increase aggregate demand, such as increasing spending, cutting taxes, or raising transfers.

Contractionary Fiscal Policy

Government actions that decrease aggregate demand, such as reducing spending, raising taxes, or cutting transfers.

Lump-Sum Taxes

Taxes that do not depend on the taxpayer’s income or economic activity.

Automatic Stabilizers

Government spending and tax rules that automatically increase spending when the economy contracts and reduce spending when the economy expands.

Discretionary Fiscal Policy

Fiscal policy that results from deliberate actions by policymakers rather than automatic adjustments.

Multiplier Effect

The total increase in real GDP resulting from an initial increase in autonomous spending, amplified through successive rounds of consumption.