Unit 3 AP Macro Vocab (3.1-3.9)

Wealth

Wealth

The value of a household’s accumulated savings.

Aggregate Demand Curve

Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

Real Wealth Effect

The change in consumer spending caused by the altered purchasing power of consumers’ assets.

Interest Rate Effect

The change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money.

Exchange Rate Effect

The change in net exports caused by a change in the value of the domestic currency, leading to a change in the relative price of domestic and foreign goods and services.

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

Expenditure Multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change. This indicates the total rise in real GDP that results from each $1 of an initial rise in spending

Tax Multiplier

the factor by which a change in tax collections changes real GDP

Aggregate Supply Curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

Nominal Wage

the dollar amount of the wage paid

Sticky Wages

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

Short-Run Aggregate Supply Curve

shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short-run

The short run

the time period in which many production costs, including nominal wages, are not fully flexible

The long run

the time period in which all prices, including wages, are fully flexible

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 real GDP the economy can produce if all resources are fully employed

Short-Run Macroeconomic Equilibrium

occurs where the quantity of aggregate output supplied is equal to the quantity of aggregate output demanded- that is, where the AD and SRAS curves intersect

Long-Run Macroeconomic Equilibrium

occurs when a short-run macroeconomic equilibrium is at the full employment level of output (on the LRAS curve)

Output Gap

the difference between actual output and full employment output

Demand Shock

an event that shifts the aggregate demand curve

Supply Shock

an event that shifts the short-run aggregate supply curve

Stagflation

the combination of inflation and stagnating (or decreasing) aggregate output

Long-Run Self Adjustment

the process that brings the economy back to equilibrium after a supply or demand shock if there is no government policy response

Fiscal Policy

the use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy

Expansionary Fiscal Policy

increases aggregate demand to close a recessionary gap; it involves the government increasing spending or transfer payments, or decreasing taxes

Contractionary Fiscal Policy

decreases aggregate demand to close an inflationary gap; it involves the government decreasing spending or transfer payments, or increasing taxes

Discretionary Fiscal Policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules

Automatic Stabilizers

government spending and taxation rules that cause fiscal policy to automatically be expansionary when the economy contracts, and automatically contractionary when the economy expands