economics terms- national income and price determination

multiplier 

The factor that shows how a change in spending (like investment or government spending) causes a larger change in total GDP.

average propensity to consume

The fraction of total income that people spend on goods and services instead of saving.

average propensity to saves

The fraction of total income that people save instead of spending on goods and services.

marginal propensity to consume

The portion of any extra income that people spend on goods and services rather than save.

marginal propensity to save

The portion of any extra income that people choose to save instead of spend

wealth effect

The idea that when people feel richer—because the value of their assets like homes or stocks goes up—they spend more, even if their income hasn’t changed.

interest rate effect

The concept that when the price level rises, people need more money for spending, which increases interest rates and reduces investment and consumption, lowering the quantity of goods and services demanded.

foreign purchases effect

When a country’s price level rises, its goods become more expensive for foreigners, so exports fall and imports rise, reducing the quantity of domestic goods demanded.

determinants of aggregate demand

Factors that cause the overall demand for goods and services in an economy to change, such as:

1. Consumer spending – changes in income, wealth, or confidence.

2. Investment spending – changes in interest rates or business expectations.

3. Government spending – increases or decreases in government purchases.

4. Net exports – changes in foreign income or exchange rates.

determinants of agreggate supply

Factors that cause the total supply of goods and services in an economy to change, such as:

1. Resource prices – wages, raw materials, and energy costs.

2. Technology – improvements can increase productivity.

3. Government policies – taxes, regulations, or subsidies.

4. Supply shocks – natural disasters or sudden changes in resource availability.

aggregate demand

The total quantity of goods and services that all households, businesses, government, and foreigners want to buy at different price levels in an economy.

aggregate supply

The total quantity of goods and services that all producers in an economy are willing and able to produce at different price levels.

demand shock

A sudden event that unexpectedly increases or decreases aggregate demand in the economy, like a surge in consumer spending or a drop in exports.

supply shock

A sudden event that unexpectedly increases or decreases aggregate supply in the economy, such as a natural disaster, new technology, or a spike in oil prices.

short run equilibrium

The point where aggregate demand equals aggregate supply in the short run, determining the economy’s current output and price level.

nominal wage

The amount of money a worker is paid per hour, week, or year, not adjusted for inflation.

sticky wage

A wage that does not adjust quickly to changes in the economy, even when prices rise or fall.

potential output

The level of goods and services an economy can produce when all resources are used efficiently, without causing inflation.

long run equilibrium

The point where aggregate demand equals long-run aggregate supply, meaning the economy is producing at its potential output and prices are stable.

output gap

The difference between an economy’s actual output and its potential output. A positive gap means the economy is overproducing, and a negative gap means it is underproducing.

equilibrium price level

The price at which the quantity of goods and services demanded equals the quantity supplied in the economy.

inflationary gap

The amount by which actual output exceeds potential output, causing upward pressure on prices.

equilibrium real output

The level of goods and services produced where aggregate demand equals aggregate supply, showing the economy’s actual production.

recessionary gap

The amount by which actual output falls short of potential output, indicating underused resources and unemployment in the economy.