APMacro Unit 3

Aggregate demand

total demand for goods and services in the economy

Stagflation

An increase in prices with falling output (GDP). Usually caused by a negative supply shock.

Hyperinflation

Very rapid price increases in excess of 50 percent per year

Marginal Propensity to Consume (MPC)

The amount by which consumption increases for every dollar of real income

Marginal Propensity to Save (MPS)

The amount by which saving increases for every dollar of real income.

MPC + MPS = 1

Formula showing mathematical relationship between MPC and MPS

Inflationary gap

A short-run situation where output GDP is greater than potential GDP. This could also be called a positive output gap.

Positive output gap

A short-run situation where output GDP is greater than potential GDP. This could also be called an inflationary gap.

Negative output gap

A short-run situation where output GDP is less than potential GDP. This could also be called a recessionary gap.

Wealth effect

One of three factors to explain why the aggregate demand curve is downward sloping. At higher prices, each dollar is worth less, leading to less aggregate quantity demanded. At lower prices, each dollar is worth more, leading to more aggregate quantity demanded.

Interest rate effect

One of three factors to explain why the aggregate demand curve is downward sloping. At higher prices, less money is available to be saved because it is needed for purchasing goods/services. Less savings leads to higher interest rates in the loanable funds market. Higher interest rates discourage borrowing, which means at high price levels there will be less borrowing, thus less spending, thus less aggregate quantity demanded. leading to less aggregate quantity demanded.

Foreign trade effect

One of three factors to explain why the aggregate demand curve is downward sloping. As the price level goes up in the US, this makes US goods more expensive in other countries. This will discourage Exports, lowering Net Exports which is a determinant of Aggregate demand. Thus, at higher price levels we know aggregate quantity demanded will be less than at lower price levels.

Supply shock

An sudden, surprise event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general

Taxes

Compulsory contribution levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions.

Subsidy

Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government.

Regulations

Imposition of rules by the government, backed by the use of penalties that are intended specifically to modify the economic behavior of individuals and firms in the private sector. They increase the cost of doing business (so new ones can shift SRAS to the left).

Autonomous consumption

The minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities.

Disposable income

Net income available to be spent or saved as one wishes. Consumption + Savings will equal this.

Non-discretionary fiscal policy

laws automatically speed up or slow down the economy without making a new law (e.g. unemployment benefits, progressive income tax system, etc). Also known as automatic stabilizers.

Automatic stabilizers

A term for non-discretionary fiscal policy - existing laws that help flatten the severity of the business cycle.

Price level

The average of current prices across the entire spectrum of goods and services produced in the economy.

Fiscal policy

Laws made by the legislative branch to effect spending and taxes.

short-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs such as input prices and wages are fixed. It is upward sloping.

Aggregate

This term means added all together

Demand shock

A sudden, surprise event that shifts aggregate demand (can be negative or positive).

Potential GDP

Another name for full GDP, that focuses on how much the country can produce if it is at long-run equilibrium.

Recessionary gap

short-run situation where output GDP is less than potential GDP.

Sticky wages

The pay of employed workers tends to have a slow response to the changes in the performance of a company or of the broader economy. They do not change in the short run.

Cost-push inflation

When aggregate supply shifts to the left due to the increase of a key resource in production, causing the overall price level to go up. Also known as a negative supply shock, this can lead to stagflation.

Demand-pull inflation

Aggregate demand shifts to right causing price levels to go up, i.e. too much money chasing too few goods.

Expenditure multiplier

A formula for quantifying the change that consumption, government spending, investment and/or net exports has on the overall Gross Domestic Product of a country. Calculated with the formula 1/MPS.

1/MPS

Formula for Expenditure Multiplier

Tax multiplier

A formula for quantifying the change that a tax cut on either businesses (I) or consumers (C) has on the overall Gross Domestic Product of a country. Calculated with the formula -(MPC/MPS).

-(MPC/MPS)

Formula for the Tax Multiplier

-(Spending Multiplier - 1 )

An alternative method for the calculating tax multiplier that can be used only for multiple-choice questions (instead of using -(MPC/MPS)

Sticky prices

Resource prices (such as lumber used to build a sofa) that stay the same in the short-run despite changes in the price level.

Flexible wages

Wages that have responded (in the long run) to changes in market prices (unlike sticky wages which don't respond in the short run).

Full-employment output

Another name for full GDP / potential GDP that focuses on the fact that employment is at the NRU.

Real output

Another name for real GDP that focuses on how much is produced.

National income

Another name for real GDP that focuses on how much the production of a country earned in wages, rent, profit, and interest.

actions of the government

This is a determinant of Aggregate Supply- it includes taxes on producers, subsidies for domestic producers, changes in government regulations

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

Productivity

A determinant of Aggregate Supply, increases in this can be caused by workers becoming more efficient, changes in automation, etc.

Positive output gap

When actual GDP is above the productive potential of the economy and it is in boom.

Negative output gap

When actual GDP is below the productive potential of the economy.

demand-pull inflation

inflation that is caused by an increase in aggregate demand. Shift of AD to the right.

cost-push inflation

rising prices as a result of rising production costs. Shift of SRAS to the left.

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

output gap

the percentage difference between actual aggregate output and potential output. Can be negative or positive.

discretionary fiscal policy

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

decision lag

The time it takes Congress and the administration to decide on a policy once a problem is recognized.

implementation lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

C+I+G+(X-M)

The determinants of aggregate demand (things that shift aggregate demand when changed).

Maximum Sustainability

Represented as the PPC line and LRAS, while in the short run we may exceed this, this term is the concept that in the long-run, we have limits to how much we can produce over time given current limited resources.

NRU

The level of unemployment that only includes frictional and structural (no cyclical). When we are at this level of unemployment, we are producing at LRAS.

Long-Run Self-Adjustment

the process through which an economy will return to full employment output even without government intervention. In a negative output gap, SRAS will shift to right was wages and prices become flexible, restoring long-run equilibrium. In a positive output gap, SRAS will shift to left.

Economic growth

Causes LRAS to shift to the right.