AP Macro - Unit 3 Vocab

Marginal Propensity to Consume

MPC - the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services as opposed to saving it.

Marginal Propensity to Save

MPS - the fraction of an increase in income that is not spent and instead used for saving

Aggregate Demand

the total demand for goods and services within a particular market

Short Run Aggregate supply

SRAS - the total amount of goods and services that a country can produce at different price levels.

Long Run Aggregate Supply

LRAS - total amount of goods and services an economy can produce when using all of its resources efficiently

Demand Shock

an unexpected event that increases or decreases demand for a product or service

Supply Shock

an unexpected change in the availability of a product or service, which can cause prices to rise or fall

Demand-Pull Inflation

an economic situation where demand for goods and services is higher than the supply

Cost-Push Inflation

type of inflation that occurs when the cost of production increases, which leads to higher price levels.

Expansionary Fiscal Policy

aims to stimulate the economic growth by increasing government spending, lowering taxes, ejecting more money into the economy to boost aggregate demand

Contractionary Fiscal Policy

reduces the amount of money in circulation in an economy. Cuts spending, raises taxes, etc

Inflationary Output Gap

positive output gap that occurs when demand for goods and services exceeds supply

Recessionary Output Gap

occurs when an economy’s actual output is less than the potential output or RGDP is lower than GDP at full employment.

Automatic Stabilizers

features of the structure of modern gov’t budgets, particularly income taxes and welfare spending, that act to damp out fluctuations in the GDP

MPC Formula

Change in Consumption / Change in disposable income (Yd)

MPS Formula

Change in Savings / Change in Disposable Income (Yd)

Spending Multiplier

1 / (1-MPC) or 1 / MPS

Tax Multiplier

-MPC / 1 - MPC or -MPC / MPS

Transfer Multiplier

MPC / 1- MPS or MPC / MPS