Unit 3 AP Macroeconomics Vocab

Aggregate

Added all together

Aggregate demand AD

All the goods and services that buyers ware willing and able to purchase at different price levels, real GDP

Wealth effect/Real balance effect

Higher price levels reduce the purchasing power of money and decreases quantity of expenditures and vice versa

Interest rate effect

For price level increases, lenders need to charge higher interest rate to get a real return on loans, high interest rates discourage consumers and investing

Foreign trade effect

 When your price level rises, exports falls and imports rise causing real GDP

Multiplier effect

Initial change in spending will set off a magnified, spending chain

Marginal Propensity to Consume MPC

How much people consumer rather than save when there is a change in disposable income, expressed as a fraction/decimal

Marginal Propensity to Save MPS

How much people save rather than consume when there is a change in disposable income, expressed as a fraction/decimal

Aggregate Supply AS

Amount of goods and services (real GDP) that firms will produce in an economy at different price levels

Short-run aggregate supply SRAS

Wages & resources prices are sticky & won't change as price level changes

Long-run aggregate supply LRAS

Wages & resource prices are flexible & will change as price level changes

Stagflation

Stagnant economy + inflation causes a recessionary gap

Demand-pull inflation

Demand pulls up prices and causes aggregate demand to increase

Cost-push inflation

Higher production costs increase prices causing SRAS to decrease

Autonomous consumption

Amount consumers will spend regardless of income to pay for necessities

Disposable income

Income after taxes

Dissaving

Negative savings

Fiscal policy

Actions by Congress to stabilize the economy

Monetary policy

Actions by the Federal Reserve Bank to stabilize the economy

Discretionary fiscal policy

New bill to change AD through government spending or taxation but lags

Non-discretionary fiscal policy/automatic stabilizers

Permanent spending or taxation laws to work counter cyclically to stabilize the economy

Contractionary fiscal policy

Laws that reduce inflation and decrease GDP by decreasing government spending and increases taxes to close an inflationary gap

Expansionary fiscal policy

Laws that reduce unemployment and increase GDP by increasing government spending and decreasing taxes to close a recessionary gap

Inflationary gap/positive output

Above or beyond full employment

Recessionary gap/negative output gap

Below or less than full employment

Shifter of Aggregate Demand =

AD = GDP = C + | + G + Xn =

change in Consumer spending + change in Investment spending + change in Government spending + change in Net Exports (X-m)

Marginal Propensity to Consume MPC =

Change in Consumption/Change in disposable income

Marginal Propensity to Save MPS =

Change in Savings/Change in disposable income

MPS =

1 - MPC

Spending Multiplier =

1/MPS or 1/(1-MPC)

Total Change in GDP =

Spending Multiplier x Initial change in Spending

Simple Tax Multiplier =

MPC x (1/MPS) or MPC/MPS

Total Change in GDP =

Tax Multiplier x Initial change in Taxes

 Shifters of Aggregate Supply = AS = R+ A + P

change in Resource prices + change in Actions of the government + change in Productivity