Unit 3 - National Income and Price Determination

Aggregate demand

The total amount of spend on domestic goods and services in an economy

Automatic Stabilizers

Tools built into federal budgets that reduce the impact of the business cycle

Tight/Contractionary Fiscal Policy

Decreasing government spending or increasing taxes

Cost-push Inflation

The cost of things pushes inflation higher

Crowding Out

An economic phenomenon where increased government spending or borrowing leads to a decrease in private investment and consumption

Demand-Pull Inflation

Caused by an aggregate demand shift to the right due to a shock in one of the determinants of GDP

Equilibrium Price Level

The point where the quantity of a good or service demanded by consumers equals the quantity supplied by producers

Equilibrium Real Output

The point where aggregate demand equals aggregate supply, resulting in a stable price level and a specific amount of real output

Expansionary/Loose Fiscal Policy

Designed to shift AD to the right and correct a recessionary gap

Fiscal Policy

Controlled by congress and president, use of government spending or tax policy to influence the economy. Use of government spending or tax policy to influence the economy.

Foreign Purchase Effect

The relationship between domestic price levels and net exports

Inflationary Gap

Actual output exceeds full-employment output

Injection

Any addition to the circular flow of income, increasing economic activity

Interest Rate Effect

When the price level decreases, you need less money in your pocket to buy stuff

Investment

purchase of goods that are not consumed immediately but are used to produce other goods and services in the future

Investment Schedule

A table that shows the amount of investment businesses plan to make at each possible level of national income or GDP

Leakage

Any money that is taken out of the circular flow of income

Long Run Aggregate Supply

the total output an economy can produce when all factors of production are fully utilized

Macroeconomic Equilibrium

The state in an economy where aggregate demand equals aggregate supply

Marginal Propensity to Consume

The proportion of any additional income that is spent.

Marginal Propensity to Save

The proportion of any additional income that is saved

Monetary Policy

Uses changes in the available quantity of money to change interest rates to influence investment and consumer spending

Expenditure Multiplier

Shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy.

Tax Multiplier

The factor by which a change in taxes will alter GDP.

Net export effect

Describes how changes in a country's relative price level impact net exports, which in turn affects aggregate demand and overall economic performance.

Non Discretionary Fiscal Policy

Government spending and taxation programs that automatically adjust to changes in the economy to stabilize it without new legislative action

Phillips Curve

Inflation and unemployment have a stable and inverse relationship

Real Balances Effect

When price levels fall, the real value of money increases

Short Run Aggregate Supply

Describes the relationship between price level and the quantity of goods and services that are supplied in the economy.

What is the difference between the short and long run equilibrium?

The difference between long and short run equilibrium is long run equilibrium occurs the economy using all of its resources fully

Government Spending Multiplier

The ratio that shows how an initial increase in government spending leads to a larger change in a country's total economic output, or GDP

Recessionary Gap

Actual output < full-employment output

Stagflation

High inflation and high unemployment

Sticky Prices

When market prices or wages don't adjust quickly to changes within the economy

Supply Shock

Events that shift the SRAS

Wealth Effect

A change in the price level leads to a change in consumer spending.