Ap Macro Unit 3

Aggregate is just a fancy word for

total and overall

aggregate demand

• relationship between price levels and the quantity of aggregate output demanded by households, firms, and government

Aggregate Demand Curve x-axis (3) and y-axis and what does it look like?

• x-axis: Real GDP(C+I+G+NX) / Real Output/Aggregate Output or Y

• y-axis: price level (PL) of all goods

• Downward sloping straight line labelled AD

Why is aggregate demand curve downward sloping, js name them (4)

• Interest Rate Effect

• Exchange Rate Effect

• The Real Wealth Effect

• The Multiplier Effect

Interest Rate Effect when price levels are rising of why aggregate demand curve is downward sloping

• Price Levels are rising

• To buy more goods or services you have to spend more money

• You might not have so you might borrow

• The banks are running short of money, so they want people to stop borrowing

• So the banks will charge a higher interest rate

• People will then just borrow less, and then overall spend less

Interest Rate Effect when price levels are falling of why aggregate demand curve is downward sloping

• Price Levels are falling

• So people can spend less money to buy the same amount goods

International Effect when price levels are falling in the USA of why aggregate demand curve is downward sloping

• Price Levels fall in the United States

• Price of US goods becomes more attractive relative to foreign goods

• US Exports increase and US imports decrease

• So the NX component of Aggregate Demand increases

International Effect when price levels are increasing in the USA of why aggregate demand curve is downward sloping

• Price Levels increase in the United States

• Price of US goods becomes less attractive relative to foreign goods

• US Exports decrease and US exports decrease

• So the NX component of Aggregate Demand decreases

Money Wealth Effect/ Wealth Effect when price levels are falling in the USA of why aggregate demand curve is downward sloping

• Price Levels fall

• Purchasing power increases, so your wealtheier than before

• you will consume more goods and services

• So consumption component of Aggregate Demand increases

What are the Determinants of Aggregate Demand, change in consumer spending

• People spend their money → aggregate demand shifts right

• People not spending their money → aggregate demand shifts left

What are the Determinants of Aggregate Demand, consumer expectations?

• consumers optimistic → they spend more, shift right

• consumer worried → they spend less, shift left

What are the Determinants of Aggregate Demand, changes in wealth?

• when wealth rises → they spend more, shift right

• when wealth decreases → they spend more, shift left

What are the Determinants of Aggregate Demand, js name them? (5)

• Changes in Consumer Spending

• Change in Consumer Expectations

• Changies in Wealth

• Changes in Investment Spending

• Government Spending

• Net Export Spending

Pattern of Determinants of Aggregate Demand and what is aggregate demand based on (same answer)

it matches the expenditure approach of calculating GDP (C+I+G+NX)

personal saving definition what is it and what’s the formula

• part of disposable (after tax) income that is not consumed

• S (Savings) = DI (Disposable income) - C (Consumption

what are the only 2 things you can do with your money?

• save

• spend/consumed

when you earn more income, what happens to savings and consumption?

they both increase

what is the word for negative savings, and what does it mean?

• dissaving

• consuming in excess of Disposable Income (DI)

what is propensity?

a fancy word for likelihood

what is the average propensity to consume (APC) formula?

Consumption (C) / Disposable Income (DI)

what is the average propensity to save formula?

Savings (S)/ Disposable Income

What does Average Propnesity to Consume (APC) + Average Propensity to Save (APS) have to equal

1

Marginal Propensity to Consume (MPC or MPE) formula and what does it mean

Change in Consumption/ Change in Disposable Income

Marginal Propensity to Save (MPC or MPE) formula and what does it mean

Change in Savings / Change in Disposable Income

What does Marginal Propensity to Consume (MPC) + Marginal Propensity to Save (MPS) have to equal?

1 meaning 100 percent

why the sum of MPC and MPS amust always equal 1?

because you can only save or spend

If an economy expands/shrinks and inc/dec spending what happens to price?

it doesn’t change

what happens when theres more spending and less spending?

• more spending = inc GDP

• less spending = dec GDP

multiplier effect story and what does it determine?

• a change in a component of total spending leads to a larger change in GDP

• basically a 80 dollars gets spents at someones shop, and the owner gets 80 dollars, and this adds to GDP, the owner than spends at another shop which adds to GDP

• determines how much larger that change will be

multiplier effect formula and what does it mean when you end up calculating?

• M= change real GDP / inital change in spending (or taxation that’s changing)

• ex. multiplier effect = 3, so for every dollar spent in spending the Real GDP will increase by 3 dollars

spending multiplier effect 2 formulas and what do you use to (results in same thing)

• 1 / (1- mpc)

• 1/ MPS

• use it when given spending

• you plug into multiplier effect formula as what the equation

what do you do when you solve for the spending multiplier?

• you plug into Multiplier Effect Formula for M

• (M = Change in real GDP/ change in spending)

Tax Multiplier Effect Formula (2 both result in same), and when do you use it?

• Tax Multiplier = -MPC/MPS or -MPC/(1-MPC)

• the question will tell you if taxes are there

what do you need to remember to do for multipler effect formulas

put negatives and positives

what are the 2 aggregate supply curves

• short run aggregate supply

• long run aggregate supply

what are short run and long run based of

the flexibility of wages and input prices

what does a short run supply curve look like and x-axis, y-axis?

• upward sloping curve

• you need to label it as SAS or SRAS

• X-Axis: Real national Output

• Y-Axis: Price Level

why is short run supply curve (SAS or SRAS) upward sloping js name them

• Sticky Wage Theory, Sticky Price Theory

why is short run supply curve (SAS or SRAS) Sticky wage theory

during production times, nominal wages are slow to adjust when price levels adjust

why is short run supply curve (SAS or SRAS) sticky-price theory and why is this true (2)

• nominal price of g/s/resources are slow to adjust too in economic conditions

• deciding how much a product should cost is based on the cost of production, marketing, and delivery of the product, once a price is determined it is stuck for a period of time

• so they will simply alter output instead of changing prices

• also there are costs to adjusting prices, called menu costs

menu costs

costs to adjusting prices

What are the Determinants of Short Run Aggregate Supply (3 that have things under)?

• Changes in resource/input prices

  • land (natural resources), labor (wages), capital (tools/machines)

• Changes in Productivity

  • Worker productivity

  • Technology

• Changes in Government Regulations

  • Safety

  • Environmental

what is the relationship between real gdp and unemployment and why

• inverse

• real GDP increases which means more stuff is being made, so more workers are needed so unemployment decreases

• real GDP decreases which means less stuff is being made, so less workers are needed so unemployment increases

what does aggregate supply and aggregate demand represent?

• supply: total production of an entire economy

• demand: the total demand for an entire economy

what are the reasons that aggregate demand would shift? (6)

• changes in all of the components of aggreage demand:

• consumption (C)

• investment (I)

• government spending (G)

• exports (X)

• imports (M)

in the long run aggregate supply what do you need to know

there is no talk of changes in the price level, no prices are assumed to be held constant

long run aggregate supply curve what does it look like and what does it mean?

• because price level doesn’t affect real GDP, the curve is vertical

• in the long run, the quantity supplied is the same regardless of the price level (which is based on f.o.p)

what are the other names of long run aggregate supply curve? (3)

• Potential Output

• Full-employment output

• natural rate of output

what does long run equilibrium look like and what do you call the real gdp level equilbirium on the real gdp?

• all of them need to intersect at the same point for it to be in equilibrium

• Y*

• Yp

• YF

what does a graph look like when your economy has a recessionary gap (how do you draw it) and what does it mean?

• you draw the Short Run Aggregate Supply Curve (upward sloping)

• Aggregate Demand (downward sloping)

• LRAS is to the right of equilibrium between aggregate demand and short run aggregate supply

• the difference between the potential GDP and actual GDP

what is option A and option B for fixing recessionary gap?

1. option A: do not do anything

2. option B:

what does a graph look like when your economy has a inflationary gap (how do you draw it) and what does it mean?

• you draw the Short Run Aggregate Supply Curve (upward sloping)

• Aggregate Demand (downward sloping)

• LRAS is to the left of equilibrium between aggregate demand and short run aggregate supply

• the difference between the potential GDP and actual GDP

• price level is too high,

can you achieve a real gdp above your potential gdp?

yes

what does a demand pull inflation (short run) mean and look like?

• LRAS to the left

• aggregate demand went up (shift right)

• so output increases, price level increases, nominal wages = so real wages decreases

• this is because price level increases, and nominal wages stays the same

• this causes

what does stagflation mean, look like, and whats another name for it?

• SRAS decreases (all curves straight lines)

• people losing their jobs, and the price level going up

• unemployment rise → decrease in resource costs → businesses want to increase production → so SRAS goes back and the economy goes back and fixes itself

• cost push inflation

short run nominal wages are what

sticky (they stay the same)