Unit 3 AP Macro

Aggregate demand (AD)

The total demand for goods and services within an economy at a given price level and in a given time period.

Consumption (C)

The total spending by households on goods and services.

Investment spending (I)

The total spending by firms on capital goods such as machinery, equipment, and factories.

Government spending (G)

The total spending by the government on goods and services.

Net Exports (Xn)

The value of exports minus the value of imports.

Exports

Goods and services produced domestically and sold to foreign buyers.

Imports

Goods and services produced abroad and purchased domestically.

Real wealth Effect

the change in consumption brought about by a change in real wealth that results from a change in the price level

Interest rate Effect

the impact of changes in the price level on interest rates, which in turn affects investment and consumption spending.

Exchange Rate Effect

a lower price level causes the real exchange rate to depreciate, which stimulates spending on net exports

Marginal propensity to consume (MPC)

The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income; the proportion of additional income that is spent on consumption.

Marginal propensity to save (MPS)

The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income; the proportion of additional income that is saved rather than spent on consumption.

Spending (expenditure) multiplier

The number by which the initial amount of new spending should be multiplied to find the total resulting increase in real GDP; the ratio of the change in national income to the initial change in spending.

1/MPS or 1/ (1-MPC)

Tax multiplier

-MPC/(1-MPC); The ratio of the change in national income to the change in taxes.

Multiplier effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

Short-run aggregate supply (SRAS) curve

A curve that shows the relationship between the price level and the quantity of goods and services supplied in the short run, assuming that input prices are fixed.

Sticky wages and prices

a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand; wages and prices that do not adjust immediately to changes in economic conditions, leading to short-run fluctuations in output and employment.

Commodity

a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk; a basic good or service that is interchangeable with other goods or services of the same type.

Long-run aggregate supply (LRAS) curve

vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run; a line that shows the relationship between the price level and the quantity of goods and services supplied in the long run, assuming that all prices, including input prices, are flexible.

Flexible wages and prices

Wages and prices that adjust quickly to changes in economic conditions, leading to minimal short-run fluctuations in output and employment.

Potential output

The level of output an economy can produce when all resources are fully employed.

Economic growth

An increase in an economy's output of goods and services over time (LRAS movement)

Short-run equilibrium

the price level and real GDP that occur when the aggregate demand curve intersects the short-run aggregate supply curve

Long-run equilibrium

the price level and real GDP that occurs when (1) the actual price level equals the expected price level, (2) real GDP supplied equals potential output, and (3) real GDP supplied equals real GDP demanded

Negative (recessionary) output gap

The situation where actual output is below potential output.

Positive (inflationary) output gap

The situation where actual output is above potential output.

Positive shock

A sudden increase in aggregate demand or supply, leading to higher output and prices.

Negative shock

A sudden decrease in aggregate demand or supply, leading to lower output and prices.

Demand-pull inflation

a sustained rise in the price level caused by a rightward shift of the aggregate demand curve; inflation caused by an increase in aggregate demand exceeding the increase in aggregate supply.

Cost-push inflation

a sustained rise in the price level caused by a leftward shift of the aggregate supply curve; inflation caused by a decrease in aggregate supply due to higher production costs.

Long-run self adjustment (self-correction)

the process through which an economy will return to full employment output even without government intervention; the process by which an economy returns to its potential output level in the long run through adjustments in wages and prices.

Inflationary expectations

expectations among consumers and firms about future inflation rates, which can influence their behavior in the present.

Fiscal policy

the use of government spending and taxation to influence the economy.

Expansionary fiscal policy

fiscal policy that increases government spending or decreases taxes to stimulate economic growth.

Contractionary fiscal policy

fiscal policy that decreases government spending or increases taxes to slow down economic growth and control inflation.

Discretionary fiscal policy

deliberate changes in government spending and taxation to achieve specific economic goals.

Automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle; features of the tax and transfer system that automatically stabilize the economy during economic fluctuations, without the need for explicit government action. Examples include progressive income taxes and unemployment benefits.