ap macro unit 5

Investment

A decision-making process comparing marginal benefits and marginal costs to determine the profitability of a project.

Marginal Benefit

The expected rate of return (r) from an investment, which businesses consider when deciding to invest.

Real Interest Rate (i)

The nominal interest rate adjusted for inflation, representing the true cost of borrowing.

Opportunity Cost

The potential earnings an individual forgoes by choosing to invest their saved money instead of saving or lending it.

Investment Demand Curve

A graphical representation showing the relationship between real interest rates and the quantity of investments that businesses are willing to undertake.

Downward Sloping ID Curve

Illustrates the inverse relationship between the real interest rate and the quantity of investment, where lower interest rates encourage more investment.

Non-Interest-Rate Determinants

Factors other than interest rates that shift the investment demand curve, including costs, taxes, technological changes, and business expectations.

Multiplier Effect

The economic principle that an initial change in spending leads to a larger overall change in economic output (GDP).

Aggregate Demand (AD)

The total demand for goods and services in an economy at various price levels, determined by household, business, government, and foreign buyer expenditures.

Real-Balances Effect

The decrease in consumer spending that occurs when the price level rises, reducing the purchasing power of money balances.

Short-Run Aggregate Supply (AS) Curve

A curve representing the total output that firms will produce at different price levels when input prices are fixed.

Long-Run Aggregate Supply (AS) Curve

A vertical line at full employment output (Qf) representing the total output when prices are fully flexible and adjusted.

Demand-Pull Inflation

A situation where an increase in aggregate demand leads to rising price levels and output, above full employment output.

Cost-Push Inflation

A rise in price levels due to increases in production costs, leading to decreasing aggregate supply and higher prices simultaneously.

Equilibrium in the AD-AS Model

The state where the quantity of real output demanded equals the quantity of real output supplied, represented by the intersection of the AD and AS curves.

Factors That Shift the AS Curve

Changes in input prices, productivity, and legal-institutional environments that can increase or decrease the aggregate supply at every price level.