Unit 3 : National Income and Price Determination 💰

Aggregate demand (AD)

The inverse relationship between all spending on domestic output and the aggregate price level of that output.

Components of AD

The four general sources of demand that include consumption spending, investment spending, government purchases, and net exports.

Foreign sector substitution effect

When consumers seek goods produced in other countries as domestic prices rise, leading to increased imports.

Interest rate effect

As interest rates rise, borrowing costs increase, leading to reduced current spending by households and firms.

Wealth effect

As aggregate prices rise, the purchasing power of wealth decreases, leading to a reduction in domestic output purchased.

AD Curve

A graphical representation of the relationship between the aggregate price level and the quantity of real GDP demanded.

Changes in AD

Increases in any component of AD (C, I, G, X-M) shift AD right, while decreases shift it left.

Consumer Spending (C)

The total amount spent by households on goods and services.

Investment Spending (I)

Expenditures made by firms on capital goods intended to create future growth.

Government Spending (G)

Expenditures by the government on goods and services which directly increases AD.

Net Exports (X-M)

The value of a country's total exports minus its total imports.

Multiplier effect

The phenomenon where an initial change in spending leads to a greater overall impact on economic output.

Marginal propensity to consume (MPC)

The fraction of additional income that a household consumes rather than saves.

Marginal propensity to save (MPS)

The fraction of additional income that a household saves rather than consumes.

Spending Multiplier

A measure of how much GDP will increase or decrease following a change in government spending.

Tax Multiplier

Calculates the effect of a change in taxes on overall spending and GDP.

Short-Run Aggregate Supply (SRAS)

The positive relationship between the aggregate price level and the quantity of goods and services supplied in the short run.

Macroeconomic short-run period

A time frame where prices of goods are changing but input prices remain constant.

Inflationary gap

The amount by which equilibrium GDP exceeds full employment GDP.

Recessionary gap

The amount by which full-employment GDP exceeds equilibrium GDP.

Long-Run Aggregate Supply (LRAS)

Represents the output level of goods and services produced in an economy at full employment.

Economic growth

An increase in the production capacity of an economy, resulting in a rightward shift of LRAS.

Automatic Stabilizers

Fiscal policy tools that automatically counter fluctuations in economic activity, such as income taxes.

Fiscal policy

Government adjustments in spending levels and tax rates to monitor and influence the economy.

Expansionary fiscal policy

Involves increasing government spending or decreasing taxes to stimulate the economy.

Contractionary fiscal policy

Involves decreasing government spending or increasing taxes to cool down an overheating economy.

Sticky prices

Prices that do not change quickly in response to shifts in supply and demand.

Supply shocks

Economy-wide phenomena that significantly affect the cost of production and the supply curve.

Positive supply shocks

Events that increase productivity or lower prices of inputs.

Negative supply shocks

Events that cause sudden increases in economy-wide input prices.

Macroeconomic equilibrium

Occurs when the quantity of real output demanded equals the quantity of real output supplied.

GDP change

The net change in the overall economic output measured by the growth or contraction of GDP.

Policy incentives

Government actions meant to stimulate economic activity, like tax reductions or subsidies.

Exchange rates

The value of one currency for the purpose of conversion to another, affecting imports and exports.

Consumer tastes

Preferences that influence the demand for goods and services, impacting net exports.

Deregulation

The reduction or elimination of government rules controlling industries, potentially increasing supply.

Military spending

Expenditures by the government that contribute to economic stimulation.

Temporary aid to needy families (TANF)

A government program that provides financial assistance to families in need.

Progressive income taxes

A tax system that charges higher rates on higher income levels.

Short-Run Shifts of AS

Shifts in AS due to changes in input prices, taxation, or external events like natural disasters.

Classical school of economics

Economic theory suggesting markets function best without government intervention.

Labor force participation rate

The percentage of working-age individuals who are either employed or actively seeking work.

GDPf

The full employment GDP, or the economy's maximum sustainable output level.

GDPu

The low production GDP, indicating significant unemployment in the economy.

GDPc

The GDP at the nation's productive capacity, where all resources are efficiently utilized.

Fiscal multiplier formula

Calculated by dividing 1 by the marginal propensity to save (1/MPS) to determine how government spending influences GDP.

Cyclical unemployment

Employment variation caused by economic downturns, leading firms to reduce their workforce.

Structural unemployment

Unemployment resulting from industrial reorganization, often due to technological change.

Seasonal unemployment

Unemployment linked to seasonal work patterns or agricultural cycles.

Real GDP

The inflation-adjusted value of all finished goods and services produced within a country's borders.

Aggregate price levels

The average level of prices in the economy, often measured by indices such as CPI and PPI.

Economic stimulus

Measures taken by government or policymakers to promote economic activity and growth.

Discretionary fiscal policy

Deliberate changes in government spending and tax rates to influence the economy.

Non-discretionary fiscal policy

Automatic fiscal adjustments that occur without additional congressional action.

Economic recovery

A phase in which an economy regains and surpasses its peak performance after a recession.

Inflation rate

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Consumer confidence index

An economic indicator measuring consumers' optimism regarding their financial situation and the overall state of the economy.

Trade balance

The difference between the value of a country's exports and imports.

Government purchases of goods and services

Total expenditures on goods and services by local, state, and federal governments.

Economic shocks

Unexpected events that impact an economy, precipitating shifts in demand or supply.

Investment in human capital

Expenditures aimed at improving the skills and knowledge of the workforce.

Fiscal health

A measure of a government’s ability to sustain its financial obligations over time.

Long-Run Equilibrium

The state of the economy where AD equals AS, occurring at full employment over the long term.

Labor market dynamics

The various factors that influence the supply and demand for labor in an economy.

Aggregate output

The total value of all goods and services produced in an economy.

Expansionary monetary policy

Central bank strategies aimed at increasing the money supply to stimulate economic growth.

Contractionary monetary policy

Measures taken to reduce the money supply to curb inflation.

Disposable income

Income available for individuals to spend or save after taxes have been deducted.

Output gap

The difference between potential output and actual output in the economy.

Long-term economic growth

Sustained increase in the production capacity of an economy over time.

Market equilibrium

A situation where supply equals demand, resulting in a stable market price.

Monetary policy tools

Instruments used by central banks to control the money supply and achieve economic objectives.

Economic indicators

Statistics that provide information about economic performance and trends.

Opportunity cost

The loss of potential gain from alternatives when one alternative is chosen.

Demand-side economics

An economic theory that advocates increased government spending and lower taxes to stimulate demand.

Supply-side economics

An economic philosophy advocating tax cuts and deregulation to encourage productivity and supply.

Inflation expectations

The beliefs about the future rate of inflation, which influence economic decision-making.

Debt-to-GDP ratio

A measurement that compares a country's public debt to its gross domestic product.

Public policy tools

Mechanisms through which governments influence the economic, social, and political environment.

Real interest rate

The nominal interest rate adjusted for inflation.

Economic conditions

Current economic circumstances that affect business operations and consumer behavior.

Government transfers

Benefits given by the government, usually in the form of cash or subsidies to individuals.