AP Econ Unit 3 Terms

Aggregate

Added all together

Aggregate demand

All the goods and services (real GDP) that buyers are willing and able to purchase at different price levels.

Inflation, falls

When price level increases ______ occurs and the real GDP demanded ______.

Deflation, increases

When price level decreases ______ occurs and the real GDP demanded _____.

AD

Demand by consumers, businesses, government, and foreign countries.

Changes in price level cause a move along the curve

What definitely doesn’t shift the Aggregate Demand Curve?

C+I+G+Xn

AD=

PL

Price level

GDPr

Real Domestic Output (R)

Wealth effect, interest rate effect, foreign trade effect,

Why is the AD Downward sloping?

Wealth effect/Real Balance Effect

Higher price levels reduce the purchasing power of money, decreasing the quantity of expenditures.

Wealth effect/real balance effect

Lower price levels increase purchasing power and increase expenditures

Interest rate effect

When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans.

Interest rate effect

Higher interest rates discourage consumer spending and business investment.

Foreign trade effect

When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods.

Foreign Trade effect

Exports fall and imports rise causing real GDP demanded to fall (Xn decreases)

Increase, decrease

An _____ in spending shifts AD right, and ____ in spending shifts it left.

Change in consumer spending, investment spending, government spending, net exports

Shifters of aggregate demand

Consumer spending

Increase in disposable income

Consumer expectations

Household indebtedness

Taxes

Investment spending

Real interest rates (price of borrowing)

Future business expectations

Productivity and Technology

Business Taxes

Government spending

Expenditures such as decrease in defense spending

Increase in public works programs, government expenditures

Net exports

Exchange rates

National income compared to abroad

Investment demand

ID

Injection

When money is put in the circular flow; caused by increase in C, I, G, Nx.

Leakage

Savings form the circular flow model

Dollars

What flows around in the circular flow system

Multiplier Effect

Shows how spending is magnified in the economy.

The Multiplier effect

An initial change in spending will set off a spending chain that is magnified in the economy.

Marginal propensity to consume (MPC)

How much people consume rather than save when there is a change in disposable income; always expressed as fraction/decimal.

Change in Consumption/change in disposable income

MPC formula

Marginal propensity to save (MPS)

How much people save rather than consume when there is a change in disposable income; always expressed as fraction/decimal.

Change in savings/change in disposable income

MPS = Change in Savings/change in disposable income

1

MPC + MPS =

Spending Multiplier formula

1/MPS OR 1/1-MPC

Multiplier x Initial change in spending

Total change in GDP

Consume, lessens

As the Marginal Propensity to ______ falls, the Multiplier effect _______.

Indirect injection

Tax cut =

Simple tax multiplier formula

MPCx(1/MPS) OR MPC/MPS