U3 Vocab – AP Macro

aggregate demand (AD) curve

shows relationship between aggregate price level and quantity of aggregate output demanded by households/businesses/gov

(downwards sloping curve)

real wealth effect

when asset prices rise, homeowners (/asset-owners) feel more rich and are likely to increase consumption

e.g. boomers

interest rate effect

how changes in interest rate affect overall economic activity

exchange rate effect

impact of changes in exchange rate between countries’ currencies

expenditure/spending multiplier

1/MPS = 1/(1-MPC)

tax multiplier

-MPC/MPS = -MPC/(1-MPC)

marginal propensity to consume (MPC)

MPC = ∆ consumption / ∆ disposable income = 1-MPs

marginal propensity to save (MPS)

MPS = ∆ saving / ∆ disposable income = 1-MPC

short-run aggregate supply (SRAS)

shows positive relationship (upwards sloping) between price level as short-run aggregate supply

equilibrium price level (PL)

price level at intersection of SRAS and AD curves

equilibrium real output (Y)

rGDP at intersection of SRAS and AD curves

sticky-wages

the concept that wages remain fixed in the short-termeven as economy changes

(e.g. if unexpected inflation occurs, constant labor costs / input costs for short-term

long-run aggregate supply (LRAS)

economy’s full potential output at full employment

recessionary gap

intersection of SRAS and AD to the left of LRAS

LRAS > current rGDP

inflationary gap

intersection of SRAS and AD to the right of LRAS

LRAS < current rGDP

positive vs. negative supply shock

a right-shift / left-shift of the SRAS curve in response to an inflationary / recessionary gap

demand-pull inflation

inflation via an increase in aggregate demand

cost-push inflation

inflation via an increase in an input price with economy-wide inflation

fiscal policy

changes in gov spending and/or taxes (G&T) designed to affect level of aggregate demand (AD) in the economy

discretionary fiscal policy

change in fiscal policy (gov action in market) due to a new additional change

e.g. increasing/decreases gov spending and/or taxes

automatic stabilizers

government stabilization of the economy that does not require new action to put into place (happen automatically)

e.g. progressive taxes, welfare (stimulus checks)

government transfers

money transferred directly to citizens for no specific reason

automatic stabilizer (as unemployment rises and less people make enough money, more people receive gov transfers via welfare, raising disposable income and right-shifting AD curve

expansionary policy

fiscal policy aimed at stimulating economic growth (during recession)

e.g. increasing gov spending, decreasing taxes

contractionary policy

fiscal policy aiming to slow inflation + economic growth

e.g. decreasing government spending, increasing taxes

stagflation

rising price level + decreasing real output (increasing unemployment)