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Aggregate Demand (AD)
the inverse relationship between all spending on domestic output and the aggregate price level of that output
What does aggregate demand measure?
the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)
What are the 3 general groups of substitutes for national output?
Foreign sector substitution effect, interest rate effect, and wealth effect
Foreign Sector Substitution Effect
when goods and services produced in other nations are more appealing due to domestic inflation → brings real GDP down
Interest Rate Effect
wait-and-see mentality for goods and services in the future as prices rise and real GDP falls
Wealth Effect
as aggregate price level rises, the purchasing power of wealth decreases → reduce quantity of domestic output purchased
Wealth
the value of accumulated assets like stocks, bonds, savings, and cash on hand
What does a combination of foreign section substitution, interest rate and wealth effects predict?
a downward sloping AD curve → as aggregate prices rise, the consumption of domestic output (real GDP) falls (inverse relationship)
What happens when one of the components of aggregate demand increases while holding price level constant? What happens to GDP? What shift?
Aggregate demand increases → real GSP increases → right shift from aggregate demand
What happens when one of the components of aggregate demand decreases while holding price level constant? What happens to GDP? What shift?
Aggregate demand decreases → real GSP decreases → left shift from aggregate demand
How to stimulate real GDP/lower unemployment?
boost any or all components of AD
How to slow down aggregate demand?
rein the components of aggregate demand
What are the 4 components of aggregate demand?
consumer spending, investment spending, government spending, and net exports
Consumer Spending
when households with more money are more likely to consume and save it
Investment Spending
when firms increase investment if they believe the investment will be profitable
Government Spending
when government pushes money into the economy through various ways (direct increase in aggregate demand)
Net Exports
measure used to aggregate a country’s expenditures or GDP in an open economy
Multiplier Effect
the idea that an initial change in spending will set off a spending chain that is magnified in the economy
Marginal Propensity to Consume (MPC)
how much people consume rather than save when there is a change in income
Marginal Propensity to Save (MPS)
How much people save rather than consume when there is a change in income
how to calculate MPC
dividing the change in consumption by dividing the change in disposable income
how to calculate MPS
dividing the change in savings by dividing the change in disposable income
what should the sum of MPC and MPS equal?
MPC + MPS = 1
Spending Multiplier
an economic measure of the effect that a change in government spending and investment has on the Gross Domestic Product of a country
Tax Multiplier
used to determine the maximum change in spending when the government either increases or decreases taxes
Aggregate Supply (AS)
the relationship between the aggregated price level of all domestic output and the level of domestic output produced
Short Run Aggregate Supply (SRAS)
the positive relationship between the level of domestic output produced and the aggregate price level of that output
What happens during a macroeconomic short run period? How is the SRAS curve drawn?
the prices of goods and services are changing in their respective markets, but input prices have not been adjusted to those product market changes; SRAS curve is typically upward sloping
What happens in stage 1 of macroeconomic short-run period?
the economy is in a recession with low production meaning there are many unemployed resources
What happens in stage 2 of macroeconomic short-run period?
real GDP increases and approaches full employment, available resources are harder to find and input costs begin to rise
What happens in stage 3 of macroeconomic short-run period?
the economy is growing and approaching the nation’s productive capacity where firms cannot find unemployed units
What effects does input prices have on short run on aggregate supply curve?
If input prices fall economy-wide, the short-run AS curve increases without changing the level of full employment.
What effect does tax policy (supply side tax) haveon short run on aggregate supply curve?
if “supply-side taxes” are lowered, short-run AS shifts to the right
What effect does deregulation have on short run on aggregate supply curve?
when the regulation of industries restricts their ability to produce, the short-run AS likely increases
What effect does environmental phenomena have on short run on aggregate supply curve?
For a smaller nation or a large nation hit by an epic disaster, this could be a permanent decrease in the ability to produce
Long-Run Aggregate Supply (LRAS)
the number of goods and services that an economy is capable of producing with the full employment of resources
What happens during a macroeconomic long run period?
the input prices have enough time to fully adjust to market forces → all product and input markets are balanced = economy is at full employment (GDPf)
What effect does availability of resources have on long run on aggregate supply curve?
A larger labor force, a larger stock of capital, or more widely available natural resources can increase the level of full employment
What effect does technology and productivity have on long run on aggregate supply curve?
Better technology raises the productivity of both capital and labor; A more highly trained or educated populace increases the productivity of the labor force
What effect does policy incentives (ex. tax incentives) have on long run on aggregate supply curve?
If the policy provides large incentives to quickly find a job, full-employment real GDP rises; If the government gives tax incentives to invest in capital or technology, GDPf rises.
What does LRAS curve shift right indicate?
it indicates economic growth
Macroeconomics Equilibrium
occurs when the quantity of real output demanded is equal to the quantity of real output supplied → graphically the intersection of aggregate demand and short run aggregate supply
Recessionary Gap
the amount by which full-employment GDP exceeds equilibrium GDP
Inflationary Gap
the amount by which equilibrium GDP exceeds full employment GDP
Supply Shocks
economy-wide phenomenon that affects the costs of firms and the position of the SRAS curve, either positively or negatively; cause of SRAS shifts
what are positive supply shocks the result of?
higher or lower energy prices
When do negative supply shocks usually occur?
economy-wide input prices suddenly increase
Fiscal Policy
deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level
Expansionary Fiscal Policy
real GDP is low and unemployment is high when the economy suffers a recession
Contractionary Fiscal Policy
when the economy operates beyond full employment, inflation becomes a problem, so the government might need to contract the economy
Sticky Prices
when price levels do not change, especially downward, with changes in AD
Automatic Stabilizers
a type of fiscal policy that is already in place to offset the fluctuations or economic activity in our economy
what happens during a recessionary period?
less people are employed and less income is made for those unemployed families
what happens during a inflationary period?
income taxes with come into effect
Progressive Income Taxes
describe income taxes that tax more if that household earns more income
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