AP Macroeconomics Notes

Aggregate Demand (AD)

The total quantity of all goods and services demanded in the economy at various price levels.

Components of AD

AD = C + I + G + (X - M), where C is Consumption, I is Investment, G is Government spending, and (X - M) is Net Exports.

The Wealth Effect

A lower price level increases the real value of money, increasing purchasing power and consumption.

The Interest Rate Effect

Lower price levels lead to lower interest rates, stimulating investment spending.

The Foreign Trade Effect

Lower domestic price levels make domestic goods cheaper for foreigners, increasing exports and reducing imports.

Marginal Propensity to Consume (MPC)

MPC = ΔConsumption / ΔDisposable Income, indicating the portion of additional income that is consumed.

Marginal Propensity to Save (MPS)

MPS = ΔSavings / ΔDisposable Income, indicating the portion of additional income that is saved.

Spending Multiplier

Spending Multiplier = 1 / MPS; it shows the total change in GDP resulting from an initial change in spending.

Tax Multiplier

Tax Multiplier = -MPC / MPS; it reflects the change in GDP resulting from changes in taxation.

Short-Run Aggregate Supply (SRAS)

The relationship between the price level and the total output produced by firms in the short run.

SRAS Shifters (I.R.A.P.)

Factors affecting SRAS include Inflationary Expectations, Resource Prices, Actions of the Government, and Productivity.

Long-Run Aggregate Supply (LRAS)

A vertical line at the full-employment level of output, representing potential GDP.

Recessionary Gap

Occurs when equilibrium output is less than full-employment output, characterized by high unemployment.

Inflationary Gap

Occurs when equilibrium output is greater than full-employment output, characterized by low unemployment and price level pressures.

Expansionary Fiscal Policy

Actions taken to increase government spending or decrease taxes to stimulate the economy.

Contractionary Fiscal Policy

Actions taken to decrease government spending or increase taxes to cool down an overheated economy.

Crowding Out

The phenomenon where government borrowing raises interest rates, thus reducing private investment.

Automatic Stabilizers

Mechanisms that automatically adjust government spending and taxes without direct action by policymakers.

Sticky Wages

The concept that nominal wages tend to be slow to adjust to changes in the economy, particularly in the short run.

Potential GDP

The maximum output an economy can produce when operating at full efficiency.