AP Macroeconomics - Unit 3

Aggregate Demand

All the goods and services (real GDP) that buyers are willing and able to purchase at different price levels. There is an inverse relationship between price level and Real GDP. ​​

An increase in spending shifts AD

to the right

AD shifters

Change in Consumer Spending, Change in Investment Spending​

The multiplier effect

An initial change in spending will set off a spending chain that is magnified in the economy.​

Marginal Propensity to Consume (MPC)​

How much people consume rather than save when there is a change in disposable income.

MPC = (change in consumption)/(change in disposable income)

Marginal Propensity to Save (MPS)​

How much people save rather than consume when there is a change in disposable income. ​

MPS = (change in saving)/(change in disposable income)

Spending Multipier

1/MPS or 1/1-MPC

Change in total GDP

multiplier x change in initial spending

tax multiplier

SM-1, Opposite effect on GDP/AD

Aggregate Supply

the amount of goods and services (real GDP) that firms will produce in an economy at different price levels. The supply for everything by all firms.​

Short-run Aggregate Supply​

Wages and resource prices are sticky and WILL NOT change as price levels change.​

Long-run Aggregate Supply​

Wages and resource prices are flexible and WILL change as price levels change.​\

SRAS Shifters

R.A.P.: R-Resource Prices A-Government Actions P-Productivity

shifters of the LRAS

1. Change in resource quantity or quality ​

2. Change in technology​

Full Employment

Long Run Equilibrium. The economy is at potential output​

Inflationary Gap

ABOVE or BEYOND full employment, positive output gap​

Recessionary Gap

BELOW or LESS THAN full employment, negative output gap​

inflationary gap stats

Output is high and unemployment is less than NRU. Actual GDP above potential GDP​​

Causes of inflation

1. AD increase/Demand-pull inflation

2. SRAS decrease/cost-push inflation

3. Quantity theory of money/printing money

Recessionary Gap stats

Output low and unemployment is greater than NRU. Actual GDP below potential GDP​.

Stagflation

negative supply shock, decrease in AS, considered a recession

Government Stabilize the Economy

1. Fiscal Policy

2. Monetary Policy

Fiscal Policy

Actions by Congress to stabilize the economy.

Monetary Policy

Actions by the Federal Reserve Bank to stabilize the economy.​

Discretionary Fiscal Policy​

New stuff/Congress actions (spending or taxation), problem=lag time

Non-Discretionary Fiscal Policy​

permanent bills, automatic stabalizers

Contractionary Fiscal Policy

Laws that reduce inflation, decrease GDP (Close an Inflationary Gap).​

• Decrease Government Spending.​

• Increase Taxes (Decreasing disposable income).​

• Decrease Transfers​

Expansionary Fiscal Policy

Laws that reduce unemployment and increase GDP (Close a Recessionary Gap). ​

• Increase Government Spending.​

• Decrease Taxes (Increasing disposable income).​

• Increase Transfers​

Multiplier for transfer payments

same as tax, one less than the spending multipler