Economy Unit 3 Vocab

Marginal Propensity to Consume

the increase in consumer spending when income rises by $1. Because consumers normally spend part but not all of an additional dollar of disposable income, MPC is between 0 and 1.

Marginal Propensity to Save

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

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’s 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 between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

Planned Investment Spending

the investment spending that firms intend to undertake during a given period. Planned investment spending may differ from actual investment spending due to unplanned inventory investment.

Inventories

stocks of goods and raw materials held to satisfy future sales

Inventory Investment

the value of the change in total inventories held in the economy during a given period. Unlike other types of investment spending, inventory investment can be negative if inventories fall.

Unplanned Inventory Investment

unplanned changes in inventories, which occur when actual sales are more or less than businesses expected; 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 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 effect on consumer spending caused by the change in the purchasing power of consumers’ assets when aggregate price level changes. A rise in the aggregate price level decreases the purchasing power of consumers' assets, so they decrease their consumption; a fall in the aggregate price level increases the purchasing powers of consumers' assets so they increase their consumption.

Interest Rate Effect of a Change in the Aggregate Price Level

the effect on consumer spending and investment spending caused by a change in the purchasing power of consumers' money holding when the aggregate price level changes. A rise in the aggregate price level decreases the purchasing power of consumers' money holdings. In response consumers try to increase their money holdings, which drives up interest rates, thereby decreasing consumption and investment.

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 the interest rate to stabilize the economy.

Aggregate Supply Curve

a graphical representation that shows the relationship between the aggregate price level and the total quantity of aggregate output supplied. 

Nominal Wage

the dollar amount of any given wage paid.

Sticky Wages

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

a graphical representation of 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. The short run aggregate supply curve has a positive slope because a rise in the aggregate price level at least to arise in profits, and therefore output, when production costs are fixed.

Long-run Aggregate Supply Curve

a graphical representation of the relationship between the aggregate price level and the quantity of aggregate output supplied if all prices, including nominal wages, were fully flexible. The long run aggregate supply curve is vertical because the aggregate price level has no effect on aggregate output in the long run; in the long run, aggregate output is determined by the economy's potential output.

Potential Output

what can be produced if the economy were operating at maximum sustainable employment, where unemployment is at its natural rate.

AD-AS Model

the basic model used to understand fluctuations in aggregate output and the aggregate price level. It uses the aggregate demand curve and the aggregate supply curve together to analyze the behavior of the economy in response to shockks or government policy.

Short-run Macroeconomic Equilibrium

the point at which the quanitty of aggregate output supplied is equal to the quantity demanded.

Short-run Equilibrium Aggregate Price Level

the aggregate output produced in short-run macroeconomic equilibrium.

Short-run Equilibrium Aggregate Output

the quantity of aggregate output produced in short-run macroeconomic equilibrium.

Demand Shock

any event that shifts the aggregate demand curve. A positive demand shock is associated with a higher demand for aggregate output at any price level and shifts the curve to the right. A negative demand shock is associated with the lower demand for aggregate output at any price level and shifts the curve to the left.

Supply Shock

an event that shifts the short run aggregate supply curve. A negative supply shock raises production costs and reduces the quantity supplied at any aggregate price level, shifting the curve leftward. A positive supply shock decreases production costs and increases the quantity supplied at any aggregate price level, shifting The Curve rightward.

Stagflation

the combination of inflation and falling aggregate output.

Long-run Macroeconomic Equilibrium

a situation in which the short-run macroeconomic equilibrium is also on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output. 

Recessionary Gap

exists when aggregate output is below potential output.

Inflationary Gap

exists when aggregate output is above potential output.

Output Gap

the percentage difference between actual aggregate output and potential output. 

Self-Correcting

refers to the fact that in the long run, shocks to aggregate demand affect aggregate output in the short run, but not the long run. 

Stabilization Policy

the use of governement policy to reduce the severity of recessions and to rein in excessively strong expansions. There are two main tools of stabilization policy: monetary policy and fiscal policy.

Social Insurance

government programs–like Social Security, Medicare, unemployment insurance, and food stamps–intented to protect families against economic hardship.

Expansionary Fiscal Policy

fiscal policy that increases aggregate demand by increasing governemnt purchases, decreasing taxes, or increasing transfers.

Contractionary Fiscal Policy

fiscal policy that reduces aggregate demand by decreasing government purchases, increasing taxes, or decreasing transfers. 

Lump-sum Taxes

taxes that don’t depend on taxpayer’s income. 

Automatic Stabilizers

government spending and taxation rules that cause fiscal policy to be automaticall expansionary when the economy contracts and automatically contractionary when the economy expands. Taxes that depend on disposable income are the most important example of automatic stabilizers. 

Discretionary Fiscal Policy

fiscal policy that is the direct result of deliberate actions by policy makers rather than rules.