AP Econ Unit 3

Aggregate Demand

The demand for all finished goods and services at various price levels in a given period of time.

Aggregate demand curve

Shows the relationship between the desire for aggregate goods and services by consumers, businesses, government, and the rest of the world and the aggregate price level for all goods and services

Wealth effect

What happens to consumer spending when the aggregate price level changes

Interest rate effect

The impact that changes in borrowing power has on aggregate demand and aggregate prices

Appreciated

When a currency increases in value compared to other currencies (buying power for foreign good increases)

Depreciated

When a currency decreases in value compared to other currencies (buying power for foreign goods lessens)

Multiplier effect

Refers to how an increase (or decrease) in one economic activity causes increases (or decreases) across a range of other related economic activities

Marginal Propensity to Consume (MPC)

( change in consumption / change in disposable income )

Refers to the percentage of new income a consumer spends on goods and services compared to what they save

Marginal Propensity to Save (MPS)

( change in savings / change in disposable income )

Refers to the percentage of aggregate new income not used for consumption

Disposable income

What is left over after these autonomous expenditures are taken care of

Expenditure multiplier (spending multiplier)

Ex. An annual bonus or a raise in salary

Tax Multiplier

Refers to how an increase (or decrease) in taxes impacts spending and GDP

Short-run

Refers to the fact that producers have fixed and variable costs - like wages and contracts - that limit their ability and flexibility to respond to market changes to maintain their profits.

Long-run

Refers to a period of time when all production and costs can be changed

Short-Run Aggregate Supply (SRAS)

The total output (aggregate) of goods and services (GDP) that exist in a period of time when production costs can be considered fixed (and thus not easily and quickly changed)

short-run aggregate supply curve

Shows the positive between an economy's aggregate price level and the total quantity of final goods and services (real GDP) supplied by producers - in the short run

profitable

Price per unit sold-production costs per unit = profit per unit

Nominal wages

The dollar amounts paid to employees that are not easily changed

Sticky wages

when nominal wages are slow to rise or fall in response to changes in the economy

Nominal Price Rigidity (Price Stickiness)

Refers to prices for goods and services that are fixed or not very flexible

Pricing power

the ability to escape price competition and to justify higher prices and margins without losing market share

Long Run Aggregate Supply (LRAS)

Refers to the timeframe when price levels, wages, and contracts can adjust to the changes in the economy

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 output (potential output)

Level of real GDP if all prices and wages were fully flexible and used efficiently

Output gap

The difference between the full employment output and real GDP

Aggregate demand - aggregate supply model

combines aggregate demand data with aggregate supply data. Allows economists and analysts to get an overview of an economy by bringing together key elements that affect it

Equilibrium

When market supply and demand are balanced and prices are stable

short-run macroeconomic equilibrium

The amount of aggregate output supplied by producers equals the aggregate demand by consumers, businesses, and governments

short-run equilibrium aggregate price level

the aggregate price level in the short-run macroeconomic equilibrium

short-run equilibrium aggregate output

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

Output gaps

Difference between actual and potential output.

Inflationary gap

When aggregate demand for goods and services is greater than aggregate supply

Recessionary gap

When an economy is operating below full employment equilibrium

Aggregate demand shock

an unforeseen event or occurrence that causes an increase or decrease in demand for goods and services

Positive demand shock

an increase in aggregate demand, represented by a shift of the aggregate demand curve to the right

negative demand shock

a decrease in aggregate demand, represented by a shift of the aggregate demand curve to the left

Supply shock

When something unforeseen quickly and dramatically changes product supply levels

Positive supply shock

creates increased aggregate supply

negative supply shock

results in lower aggregate supply

Stagflation

Occurs when inflation meets decreasing aggregate output. (Stagnation + inflation)

Inflation

Measures the rate at which the aggregate price levels in an economy increase over time

Developments in an economy that can cause demand-pull inflation

• Economic growth

• Export surge

• Government spending

• Inflation expectations

• More money in the system

Long-run equilibrium

Occurs when the point of short-run equilibrium intersects with the long-run aggregate supply curve

Mandatory spending/transfers

Programs that must be paid for with no goods or services in return

Social insurance

Programs such as social security, Medicare, and Medicaid.

Entitlements

Paid by taxpayers via social insurance fees throughout their working life

Discretionary spending

Results from legislation or policies that are not mandatory

expansionary fiscal policy

The goal is to increase aggregate demand to close the gap between actual GDP and potential GDP (increase government purchasing of goods and services, increase government transfers to households, decrease taxes)

contractionary fiscal policy

The goal is to decrease aggregate demand to close the gap between actual GDP and potential GDP (decrease government purchasing of goods and services, decrease government transfers to households, increase taxes)

automatic stabilizers

Fiscal policies that help moderate fluctuations in an economy and occur without special government action

Progressive taxation

A system in which as income increases so does the percentage of tax paid

Unemployment insurance

Gives newly unemployed workers some money to get by until they can find a new job. Used as an automatic stabilizer

Supplemental Nutrition Assistance Program (SNAP)

Gives vouchers (transfers) to low-income households below the FPL to buy food

Medicaid

Funds health care for individuals or families with low or no income

Government transfers

Payments to individuals with no goods or services provided in return

Federal Poverty Level/Line (FPL)

income guidelines established annually by the federal government