AP Macro Unit 3 - National Income and Price Determination (MR's Unit 4)

marginal propensity to consumer (MPC)

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

marginal propensity to save (MPS)

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

autonomous change in aggregate spending

is 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

is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change; it indicates the total rise in real GDP that results from each $1 of an initial rise in spending

consumption function

shows how a household's consumer spending varies with the household's current disposable income

autonomous consumer spending

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

aggregate consumption function

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

planned investment spending

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

inventory investment

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

unplanned inventory investment (positive)

occurs when actual sales are lower than businesses expected, leading to unplanned increases in inventories

unplanned inventory investment (negative)

occurs when actual sales are in excess of expectations, resulting in negative unplanned inventory investment

actual investment spending

is the sum of planned investment spending and unplanned investment spending

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

is 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

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

Fiscal policy

is the use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy

Monetary policy

is the central bank's use of changes in the quantity of money or the 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

is the dollar amount of the 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

Potential output

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

AD-AS model

the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations

Short-run macroeconomic equilibrium

when the quantity of aggregate output supplied is equal to the quantity demanded

Short-run equilibrium aggregate price level

is the aggregate price level in the short-run macroeconomic equilibrium

Short-run equilibrium aggregate output

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

Demand shock

an event that shifts the aggregate demand curve

Supply shock

an event that shifts the short-run aggregate supply curve

Stagflation

is the combination of inflation and stagnating (or falling) aggregate output

Long-run macroeconomic equilibrium

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

Recessionary (negative output) gap

when aggregate output is below potential output

Inflationary (positive output) gap

when aggregate output is above potential output

Output gap

is the percentage difference between actual aggregate output and potential output

Stabilization policy

is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions

Social insurance

government programs intended to protect families against economic hardship

Expansionary fiscal policy

increases aggregate demand

Contractionary fiscal policy

reduces aggregate demand

Tax multiplier

is the factor by which a change in tax collections changes real GDP

Balanced budget multiplier

is the factor by which a change in both spending and taxes changes real GDP

Lump-sum taxes

are taxes that don't depend on the taxpayer's income

Automatic stabilizers

are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically expansionary when the economy expands

Discretionary fiscal policy

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