Macroeconomics - Unit 3

Wealth

The value of a household’s accumulated savings

Planned Investment Spending

Intended investment spending by businesses during a given period

Inventory Investment

The value of the change in total inventories held in the economy during a given period

Aggregate Demand Curve

Shows the relationship between aggregate price level and quantity of aggregate output demanded by households, businesses, the government, and the rest of the world (C, I, G, X)

Real Wealth Effect

A change in the aggregate price level changes consumer spending by altering the purchasing power of consumers’ assets

Interest Rate Effect

A change in the aggregate price level changes investment and consumer spending by altering interest rates that result from changes in the demand for money

Exchange Rate Effect

A change in the aggregate price level is the change in net exports caused by a change in the value of domestic currency, which leads to change in the relative price of domestic and foreign g + s

Marginal Propensity to Consume (MPC)

The increase in spending when disposable income rises by $1; change in C/change in disposable income

Marginal Propensity to Save (MPS)

The increase in household savings when disposable income rises by $1; 1 - MPC

Expenditure Multiplier

The ratio of the total change in RGDP caused by an autonomous change in spending; 1/(1-MPC)

Tax Multiplier

The factor by which a change in tax collections changes RGDP; -MPC/(1-MPC)

Aggregate Supply Curve

Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

Nominal Wage

The dollar amount of the wage paid, not corrected for inflation

Sticky Wages

Nominal wages that change according to shocks to the AD-AS curves with a delay

Short-Run Aggregate Supply Curve

Shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run

The Short Run

The time period in which many production costs are not fully flexible

The Long Run

The time period in which all prices are fully flexible

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 and wages were fully flexible

Potential Output

The level of RGDP the economy would produce if all prices were fully flexible; the economy’s maximum sustainable production capacity

Full-Employment Output Level

The level of RGDP the economy can produce if all resources are fully employed

AD-AS Model

Used to analyze fluctuations in the price level and RGDP

Short-Run Equilibrium

Occurs when the quantity of aggregate output supplied is equal to the quantity of aggregate output demanded

Short-Run Equilibrium Aggregate Price Level

The aggregate price level at short-run equilibrium

Long-Run Equilibrium

Occurs when short-run equilibrium is at the full-employment level of output (on LRAS)

Output Gap

The difference between actual aggregate output and potential output

Recessionary Gap

When aggregate output is below potential output

Inflationary Gap

When aggregate output is above potential output

Demand Shock

An event that shifts the AD curve

Supply Shock

An event that shifts the SRAS curve

Stagflation

The combination of inflation and stagnating/falling aggregate output

Cost-Push Inflation

Inflation caused by the significant increase in the price of an input with economy-wide importance

Demand-Pull Inflation

Inflation caused by an increase in aggregate demand

Fiscal Policy

The use of government purchases of g + s, government transfers, or tax policy to stabilize the economy

Expansionary Fiscal Policy

Increases AD to close a recessionary gap; increase G, increase Tr, decrease T

Contractionary Fiscal Policy

Decreases AD to close an inflationary gap; decrease G, decrease Tr, increase T

Balanced Budget Multiplier

The factor by which increasing G and taxes by the same amount will raise RGDP by that amount

Discretionary Fiscal Policy

Fiscal policy that is the result of deliberate actions by policymakers rather than rules

Automatic Stabilizers

Government spending and taxation rules that cause fiscal policy to automatically correct for output gaps in the economy