AP Macro Unit 3 Vocab

MPC

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

MPS

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

Spending 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; indicates the total rise in real GDP that results from each $1 of an initial rise in 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.

real wealth effect

(of a change in the aggregate price level) 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) the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money.

exchange rate effect

(of a change in the aggregate price level) the change in net exports caused by a change in the value of the domestic currency, which leads to a change in the relative price of domestic and foreign goods and services

Fiscal Policy

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

short-run aggregate supply curve

shows the positive 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.

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.

Full-employment level of output

the level of real GDP the economy can produce if all resources are fully employed.

AD-AS model

the basic model we use to understand economic fluctuations—changes in real GDP, employment, and the aggregate price level.

Demand Shock

an event that shifts the aggregate demand curve.

Supply Shock

an event that shifts the short-run aggregate supply curve.

Recessionary Gap

when aggregate output is below potential output.

Inflationary Gap

when aggregate output is above potential output.

Expansionary Fiscal Policy

fiscal policy that increases aggregate demand.

contractionary fiscal policy

fiscal policy that reduces aggregate demand.

Tax Multiplier

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

automatic stabilizers

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

discretionary fiscal policy

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