AP Econ unit 3 key terms (mods 16-18)

marginal propensity to consume (MPC)

marginal propensity to consume (MPC)

the increase in consumer spending when disposable income rises by $1

marginal propensity to save (MPS)

the increase in household savings when disposable income rises by $1

autonomous change in aggregate spending

an initial rise or fall in aggregate spending that is the cause, not the result, of a series of income and spending changes.

spending multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change

consumption function

an equation showing how an individual household’s consumer spending varies with the household’s current disposable income

autonomous consumer spending

the amount of money a household would spend if it had no disposable income

aggregate consumption function

the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

planned investment spending

the investment spending that businesses intend to undertake during a given period

inventory investment

the value of the change in total inventories held in the economy during a given period

unplanned inventory investment

occurs when actual sales are less than businesses expected, leading to unplanned increases in inventories. sales in excess of expectations result in negative unplanned inventory investment.

actual investment spending

the sum of planned investment spending and unplanned inventory investment

aggregate demand curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world

wealth effect of a change in the aggregate price level

the change in consumer spending caused by the altered purchasing power of consumers’ assets

interest rate effect of a change in the aggregate price level

the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money

fiscal policy

the use of taxes, government transfers, or government purchases of goods and services to stabilize the economy

monetary policy

the central bank’s use of changes in the quantity of money or interest rate to stabilize the economy

aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

nominal wage

the dollar amount of wage paid

sticky wages

are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

short-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

potential output

the level of real GDP the economy would produce if all prices, including nominal wags, were fully flexible