ap macro -- unit 3

aggregate demand

the total amount of money people, businesses, the government, and other countries spend on goods and services in an economy.

disposable income

the money people have left after paying taxes.

expected future income

if people think they’ll earn more in the future, they might spend more now.

wealth

if people’s savings or assets (like houses, stocks, etc.) increase in value, they feel richer and spend more.

investment spending

the money businesses spend on things like buildings, equipment, and inventory to help them grow

planned investment spending

the amount businesses intend to invest, which may differ from actual spending.

inventory investment

businesses adjust how much stock they keep based on actual vs. expected sales.

the aggregate demand curve:

shows how much total spending (demand) happens in an economy at different price levels. it includes spending from households, businesses, the government, and foreign buyers.

the real wealth effect

when prices go down, people’s savings and wealth have more buying power, so they spend more.

the interest rate effect:

lower prices lead to lower interest rates, making borrowing cheaper. businesses and consumers take more loans and spend more.

the exchange rate effect

lower prices make a country’s goods cheaper for foreign buyers, increasing exports and reducing imports, which boosts demand.

expectations, wealth, size of existing capital, fiscal policy, monetary policy

shifts of the aggregate demand curve

the marginal propensity to consumer:

the portion of extra income that people spend instead of saving.

the marginal propensity to save

• the portion of extra income that people save instead of spending.

expenditure multiplier

measures how much GDP increases when government spending rises.

tax multiplier

measures how much GDP changes when taxes change.

change in spending x expenditure multiplier = change in rGDP

expenditure multiplier formula

change in taxes x tax multiplier = change in rGDP

tax multiplier formulash

short run aggregate supply

the total amount of goods and services businesses are willing to produce at different price levels in the short term.

nominal wage

the actual dollar amount workers are paid.

sticky wages;

wages do not quickly adjust to changes in economic conditions, such as inflation or unemployment.

changes in input prices, wages, productivity, expectations

shifters of the SRAS

long-run aggregate supply

the number of goods and services that an economy can produce with the full employment of resources

changes in number of resources, quality of resources, or policy.

shifters of the LRAS

short-run aggregate equilibrium

when the quantity of aggregate demanded is equal to the quantity of short run aggregate supply

long-run equilibrium/full employment level of real output

when the current output equals the potential output. 

recessionary gap

when the SR equilibrium is below LRAS, unemployment increases

inflationary gap

when the SR equilibrium is above it, unemployment decreases

negative supply shock

an unexpected unavailability of a key resource that decreases productivity

positive supply shock

an unexpected increased availability of a key resource that increases productivity

shocks

unexpected events that significantly impact the economy and lead to changes in supply or demand in the short run.

fiscal policy

the government's way of managing the economy through spending and taxation.

expansionary fiscal policy

increases output by increasing government spending or decreasing taxes. used during a recessionary gap when unemployment is high. AD shifts right, restoring equilibrium but raising price levels.

contractionary fiscal policy

decreases inflation by decreasing government spending or increasing taxes. used during an inflationary gap when the economy is overproducing. D shifts left, lowering price levels but potentially reducing real GDP.

discretionary

requires congress to pass new laws 

non-discretionary

built-in stabilizers like social security, welfare, and unemployment

time lags

 discretionary fiscal policy takes time to implement and see effects.

automatic stabilizers

• fiscal policies that automatically adjust to economic fluctuations.