AP ECON: SECTION IV

MPC FORMULA?

_{(marginal propensity to consume)}

Δconsumer spending/Δdisposable income

MPS FORMULA?

_{(marginal propensity to save)}

Δconsumer saving/Δdisposable income

1 - MPC = MPS

spending multiplier?

1/(1-MPC) or 1/MPS

what is spending multiplier?

the spending multiplier indicates the total increase in real GDP that results from each $1 of initial spending. Due to the money circulating, it has an exponential effect on the economy/GDP.

tax multiplier?

-mpc/(1-mpc)

what is the tax multiplier?

factor by which a change in tax changes real GDP. Tax cuts are considered less effective than government spending by economists as 100% of government spending is spent whereas with tax cuts, people usually save a portion, limiting the exponential effect on the economy.

shifters of aggregate demand?

remember “C + I + G + EX - IM”

• consumer spending

• investment spending

• government spending

+ exports!

- imports

shifters of sras?

remember “PEAR”

• productivity

• expectations about inflation

• actions by government

• resources

recessionary gap

when AD shifts to the left, causing greater unemployment

inflationary gap

when AD shifts to the right, raising the price level with the same RGDP.

sticky prices

people are slow to notice small price increases for goods across the economy in the short-term.

sticky wages

rises in wages are usually slow to come after increases in price across the economy.

negative supply shock

when lras shifts left, leading to stagflation.

positive supply shock

when lras shifts right. there is no gap, and therefore no “long run”

lras shifters?

remember “HPT”

• human capital

• physical capital

• technology