AP MACROECONOMICS - Unit 3 Vocab

The Multiplier Effect

The concept that any increase in spending will result in an even larger increase in GDP because every dollar spent is spent again multiple times.

Marginal Propensity to Consume (MPC)

The likelihood to spend money that one is given.

Formula for MPC

Change in Consumption/Change in Disposable Income
(ΔC/ΔDI)

Marginal Propensity to Save (MPS)

The proportion of money one saves.

Formula for MPS

Change in Money Saved/Change in Disposable Income
(ΔS/ΔDI)

Formula for Multiplier

1/MPS  OR 1/1-MPC

MPS + MPC = 

1

Formula for Calculating Change in AD or Change in GDP

Change in Spending * Multiplier

Formula for Calculating Change in Spending

Needed change in GDP/Multiplier

Tax Multiplier

Smaller than the spending multiplier and hurts GDP

Formula for Tax Multiplier

MPC/MPS

Balanced Budget Multiplier

When government spending and taxes increases by the same amount, causing GDP to increase by the same rate. This ALWAYS equals 1.

Aggregate Demand (AD)

All the goods and services (real GDP) that buyers are willing and able to purchase at different price levels 

Wealth Effect

Higher price levels reduce purchasing power of money, decreasing quantity of expenditures 

Interest-Rate Effect

When price levels increase, lenders need to charge higher interest-rates to get a real return rate on their loans.

Foreigner Trade Effect

When U.S. price level rises, foreign buyers purchase fewer U.S. goods while Americans buy more foreign goods.

Shifters of Aggregate Demand

Change in consumer spending, investment spending, change in government spending, and changes in net exports.

Aggregate Supply (AS)

The amount of goods and services (Real GDP) that firms will produce in an economy at different price levels.

Short-Run Aggregate Supply (SRAS)

Wages and resource prices will not increase as price levels increase (“sticky wages”).

Long-Run Aggregate Supply (LRAS)

Wages and resource prices will increase as price levels increase (“flexible wages”).

Shifters of Aggregate Supply

Changes in nominal wages, changes in commodity prices, changes in productivity, changes in expectations about inflation, and change in actions of the government (taxes and subsidies)

What Happens in The Long-Run in a Period of INFLATION

In the long-run, nominal wages rise. As a result, SRAS decreases, bringing the economy back to full employment.

What Happens in The Long-Run in a Period of RECESSION

In the long-run, nominal wages fall. As a result, SRAS increases, bringing the economy back to full employment.

Stabilization Policy

The use of government policy to reduce the severity of a recession and rein in inflation.

Fiscal Policy

Actions by congress to stabilize the economy.

Monetary Policy

Actions by the Federal Reserve Bank to stabilize the economy.

Discretionary Policy

A type of fiscal policy where congress creates a new bill that is designed to change AD through government spending or taxation (ex: govt. increases spending in a recession).

Non-Discretionary Policy (Automatic Stabilizers)

A type of fiscal policy that involves permanent spending or taxation laws that are enacted to work counter cyclically to stabilize the economy (ex: welfare).

Contractionary Fiscal Policy

Laws that reduce inflation and decrease GDP (close an inflationary gap). It’s either done through decreasing government spending and/or increasing taxes.

Expansionary Fiscal Policy

Laws that reduce unemployment and increase GDP (close a recessionary gap). It’s either done through increasing government spending and/or decreasing taxes.

Deficit Spending

When the government increases spending without increasing taxes, resulting in an increase in the annual deficit and the national debt.

Budget Deficit

When spending is greater than taxes so the government has to borrow the difference.

Budget Surplus

When taxes are greater than spending so there is money left over.

Balanced Budget

When spending equals taxes.