Macroeconomics - 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8

Marginal Propensity to consume

The amount the household spends out of each additional $1 of current disposable income

Marginal Propensity to save

Autonomous change in aggregate spending

Spending Multiplier

Ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.

Consumption Function

Uses an equation or a graph to show how a household’s income spending varies with the household’s current disposable income.

Vertical intercept - Household’s autonomous consumer spending (greater than zero bc they can buy using borrowed money or savings.

Slope - Rise in the increase in consumer spending and the run is the increase in current disposable income (MPC/1 = MPC)

Autonomous consumer spending

The portion of consumer spending that is independent of current income levels

Aggregate consumption function

Shows the relationship between current disposable income and consumer spending for the economy as a whole, other things equal

Planned investment spending

The investment spending that firms intend to undertake during a given period

Depended on: The interest rate, the expected future level of real GDP, and the current level of production capacity

Inventory investment

The value of the change in total inventories held in the economy during a given period. Can be negative

Unplanned inventory investment

When the firm’s inventories are higher than intended due to an unforeseen decrease in sales, resulting in unplanned inventory investment.

Actual Investment Spending

= planned investment spending + unplanned inventory investment

Aggregate demand curve

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

→ downwards sloping, shows a negative relationship between the aggregate price level and the quantity of aggregate output demanded

Wealth effect of a change in the aggregate price level

A change in the price level, changes the purchasing power of assets causing consumers to buy more (or less) goods and services

Interest rate effect of a change in the aggregate price level

A change in price level, changed the amount of savings in the economy, which changes the interest rate. This leads to a change in borrowing and investment

Fiscal policy

The use of either government spending - government purchases of final goods and services and government transfers- or tax policy to stabilize the economy

Monetary policy

Use of changes in the quantity of money or the interest rate to stabilize the economy

Aggregate Supply curve

Shows the relationship between the economy’s aggregate price level (the overall price level of final goods and services in the economy) and the total quantity of final goods and services or aggregate output, producers are willing to supply.

National Wage

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

The positive relationship between the aggregate price level and the quantity of aggregate output producers are willing to supply during the time period when many production costs, particularly nominal wages, can be taken as fixed is illustrated by the short-run aggregate supply curve

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

Potential output

Potential output refers to the maximum level of goods and services an economy can produce when it is operating at full efficiency, utilizing all its resources such as labor and capital effectively. It serves as a benchmark for assessing the health of an economy, as it indicates the sustainable output level without triggering inflation. Understanding potential output is crucial for analyzing long-term economic growth, as it reflects the productive capacity of an economy over time.

Aggregate demand-aggregate supply model (AD-AS)

Short run Macroeconomic equilibrium

The point at which the AD and SRAS curves intersect, E_sr; and the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, the government, and the rest of the world.

Short-run equilibrium aggregate price level

The aggregate price level at E_sr

Short-run equilibrium aggregate output

The aggregate output at E_sr

Demand shock

An event that shifts the aggregate demand curve, such as a change in expectation or wealth, the effect of the size of the existing stock of physical capital, or the use of fiscal or monetary policy

Supply shock

An event that shifts the short-run aggregate supply curve, such as a change in commodity prices, nominal wages or productivity

Stagflation

Often caused by a dramatic increase in the price of resources like oil or gasoline and it is called stagflation because we now have a stagnant economy

Long run macroeconomic equilibrium

When the point of short-run macroeconomic equilibrium is on the long run aggregate supply curve

Recessionary gap

When the aggregate output in the new short-run equilibrium,E_2, is below potential output

Inflationary gap

When the aggregate output in this new short-run equilibrium is above potential output and unemployment is low in order to produce this higher level of aggregate output.

Output gap

The percentage difference between actual aggregate output and potential output

self-correcting

Shocks to aggregate demand affect aggregate output in the short run but not in the long run

Expansionary Fiscal Policy

Stimulates the economy during or in anticipation of a business cycle contraction, thus increasing the aggregate demand

Contractionary fiscal policy

Enacted by a government to reduce the money supply and ultimately the spending in a country, thus reduces aggregate demand

Tax multiplier

The factor by which we multiply a change in tax collection to find the total change in real GDP

Balances budget multiplier

The factor by which er multiply a change in both spending and taxes to find the total change in real GDP

Lump sum Taxes

For which the amount owed is independent of the taxpayer’s income

Automatic stabilizers

Government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands without requiring any deliberate action by policy makers

Discretionary fiscal policy

Fiscal policy that is the direct result of deliberate actions by policy makers rather than automatics adjustment