macro unit 3 vocab

Aggregate demand (AD)

The total spending on goods and services in an economy at different price levels.

Aggregate demand curve

A downward-sloping curve showing the inverse relationship between the price level and real GDP demanded.

Wealth effect

As the price level decreases, the purchasing power of wealth increases, leading to higher consumption and aggregate demand.

Interest rate effect

A lower price level reduces interest rates, encouraging more investment and consumption, increasing aggregate demand.

Appreciate

When a currency increases in value relative to another currency, making imports cheaper and exports more expensive.

Depreciate

When a currency decreases in value relative to another currency, making imports more expensive and exports cheaper.

Multiplier

A factor that determines the overall impact of a change in spending on the economy, amplifying initial changes in expenditures.

Multiplier Effect

The process where an initial increase in spending leads to a larger overall increase in real GDP due to repeated rounds of consumption.

Marginal propensity to consume (MPC)

The fraction of additional income that households spend on consumption. Formula: MPC = ΔC / ΔY.

Marginal propensity to save (MPS)

The fraction of additional income that households save rather than spend. Formula: MPS = ΔS / ΔY.

Disposable income

The income available to households after taxes, which can be used for consumption or saving.

Expenditure multiplier

Measures the total change in GDP from an initial change in spending. Formula: 1 / (1 - MPC).

Tax multiplier (TM)

Measures the total change in GDP from a change in taxes. Formula: -MPC / (1 - MPC) (negative because tax increases reduce GDP).

Short run

A period in which at least one input is fixed, and firms can only adjust some variables to respond to economic changes.

Long run

A time frame in which all factors of production can be varied, and firms can fully adjust to changes in the economy.

Short-run aggregate supply (SRAS)

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky.

Short-run aggregate supply curve

The curve representing the total quantity of goods and services supplied at different price levels in the short run.

Profitability

The state of yielding profit, influencing the willingness of producers to supply goods and services.

Nominal wages

The amount of money paid to workers unadjusted for inflation, affecting production costs.

Sticky wages

Wages that do not adjust quickly to changes in economic conditions.

Nominal price rigidity

The resistance of prices to change regardless of shifts in supply or demand.

Pricing power

The ability of a firm or producer to set prices for goods or services instead of being dictated by market forces.

Long-run aggregate supply (LRAS)

The total quantity of goods and services that an economy can produce when all factors of production are fully employed.

Long-run aggregate supply curve

The curve depicting the total quantity of goods and services produced when all resources are optimally employed.

Full-employment output

The level of output where all resources in the economy are fully utilized, signaling the economy's potential output.

Potential output

The maximum sustainable output an economy can produce when fully employing its resources.

Output gap

The difference between actual output and potential output, indicating if the economy is over or under performing.

Aggregate supply

The total quantity of goods and services producers are willing to supply at different price levels.

Aggregate demand-aggregate supply model (AD-AS)

A macroeconomic model showing interactions between aggregate demand and aggregate supply.

Equilibrium

The point where aggregate demand equals aggregate supply, establishing the economy’s price level and output.

Short-run macroeconomic equilibrium

The intersection point of aggregate demand and short-run aggregate supply.

Short-run equilibrium aggregate price level

The price level at which aggregate demand equals short-run aggregate supply.

Short-run equilibrium aggregate output

The level of real GDP produced when aggregate demand equals short-run aggregate supply.

Long-run macroeconomic equilibrium

The situation in which the economy operates at full employment, where aggregate demand and long-run aggregate supply intersect.

Aggregate demand shock

A sudden event causing a significant shift in aggregate demand, influencing output and price levels.

Positive demand shock

An increase in aggregate demand due to better consumer confidence or government spending.

Negative demand shock

A decrease in aggregate demand that occurs due to reduced consumer spending or increased taxes.

Negative supply shock

A sudden decrease in aggregate supply due to rising costs or supply chain issues.

Positive supply shock

An increase in aggregate supply often resulting from technological advancements.

Stagflation

An economic condition characterized by high inflation and stagnant growth, frequently provoked by a negative supply shock.