apmacro vocab 3

aggregate demand (AD)

the amount of total spending on domestic goods and services in an economy

aggregate supply (AS)

the total quantity of output (i.e. real GDP) firms will produce and sell

consumption

the using up of a resource

inflationary gap

when aggregate output is above potential output

interest rate

Percentage of amount borrowed to be added to the amount loaned and paid back

long run aggregate supply

wages and resource prices will increase as price levels increase

macroeconomic equilibrium

the point where the quantity of aggregate demand equals the quantity of aggregate supply

marginal propensity to consume (MPC)

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

marginal propensity to save (MPS)

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

multiplier effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

productivity

The value of a particular product compared to the amount of labor needed to make it.

recessionary gap

when aggregate output is below potential output (high U%, low GDP%)

sticky wage and price model

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

wealth (wealth effect)

the change in consumer spending caused by the altered purchasing power of consumers' assets

average propensity to consume

the percentage of each dollar of income, on average, that a person spends for current needs rather than savings

average propensity to save

Fraction (or percentage) of disposable income that households save; saving divided by disposable income.

balanced-budget multiplier

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

consumption function (schedule)

a schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income

Demand shock (positive and negative)

an event that shifts the aggregate demand curve

interest rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

investment demand curve

A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.

keynesian economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.

leakage

any diversion of income from the domestic spending stream; includes saving, taxes, and imports

say's law

supply creates its own demand

spending multiplier

1/MPS

stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

supply shock

a sudden shortage of a good

tax multiplier

-MPC/MPS

unemployment insurance

a government program that partially protects workers' incomes when they become unemployed

progressive taxation

the tax as a percentage of income increases as income increases

income tax

A tax on people's earnings

medicaid

A federal and state assistance program that pays for health care services for people who cannot afford them.

SNAP (supplemental nutrition assistance program)

the largest anti-poverty program, which provides recipients with a debit card for food at most grocery stores; formerly known as food stamps

government transfers

payments that the government makes to individuals without expecting a good or service in return

federal poverty line

federal index that defines "official" poverty in the United States based on household income; updated annually

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

discretionary policies

results from legislation or policies that are not mandatory

mandatory spending

Required govt spending by permanent laws

social insurance (entitlements)

Programs in which eligibility is based on prior contributions to government, usually in the form of payroll taxes.

short run equilibrium aggregate price level

the aggregate price level in the short-run macroeconomic equilibrium

expansionary fiscal policy

fiscal policy that increases aggregate demand

contractionary fiscal policy

fiscal policy that reduces aggregate demand

long run equilibrium out put gap

when the current output is equal to potential output

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

the level of output that results when the labor market is in equilibrium and the economy is producing at full employment