AP Macro unit 3

ap macro

Aggregate

added all together

Aggregate Demand

all the good and services that buyers are willing and able to purchase at different price levels. Demand by consumers, businesses, govt and foreign countires.

relationship between price level and real gdp

inverse

If PL increases

inflation, real gdp demanded falls

if PL decreases

deflation, real gdp demanded increases

Changes in PL only cause

movements along the curve, they dont shift it

AD eq

C+I+G+Xn

Wealth effect

higher price levels reduce the purchasing power of money. People spend less. Lower price levels increase purchasing power. People spend more

When PL goes up

GDP demanded goes down

Intrest rate effect

when the price level increases. lenders need to charge higher intrest rates to get a real return on loans. Higher intrest rates discourage consumer spending and business investment

Foreign trade effect

When US PL rise, foreign buyers purchase fewer US good and americans buy more foreign goods. Exports fall and imports rise, causing real gdp demanded to fall(Xn decreases)

Change in consumer spending

(Shifter of AD) increase in disposable income, consumer expectations, household debt and taxes

Change in investment spending

(Shifter of AD) real interest rates, future business expectations, productivity and technology, business taxes

Change in govt spending

(Shifter of AD) govt expedenters(spending money)

Change in net exports (x-m)

(Shifter of AD) exchange rates, national income compared to abroad, if there is a recession

MPC

how much people consumer rather than save when there is change in disposable income

MPC formula

change in consumption/change in disposable income

MPS

how much people save rather than consume when there is a change in disposable income

MPS formulas

change in savings/change in disposable income. 1-mpc

Spending multiplier

1/mps or 1/1-mpc

total change in gdp

multiplier x initial change in spending & initial change in taxes

simple tax multiplier

mpc x 1/mps or mpc/mps

the tax multiplier is negative when

an increase in taxes decreases gdp

Aggregate supply

the amount of good and services that firms will produce in an economy at different price levels

SRAS

when PL goes up, businesses have an incentive to produce more in the short run. Wages and resource prices are sticky and will not change as PL changes

LRAS

wages and resource prices are flexible and will change as PL changes

R(shifters in SRAS)

change in resource prices: price of domestic and imported resources, supply shocks and inflationary expectations

A(shifters in SRAS)

change in actions by the govt(NOT govt spending). Taxes on producers, subsidies for domestic producers, govt regulations

P(shifters in SRAS)

change in productivity: technology

In the short run

wages and resource prices are sticky and will not change when price levels change

In the long run

PL increased but GDP doesent. We assume that in the long-run the economy will produce at full employment

Shifters in LRAS

1.change in resource quantity or quality 2.change in technology

When the govt increases spending

PL and Q(full employment) will increase

When there is a positive output gap (inflationary gap)

output is high and unemployment is less than NRU. Actual GDP is above potential GDP

when Consumer spending falls

PL and Q will decrease

when there is a Recessionary Gap(negative output gap)

output is low and unemployment is greater than NRU. Actual GDP is below potential GDP

Shifters of AD

change in consumer spending, change in investment spending, change in government spending and net export spending

Shifter os AS

change in resource prices, change in actions of the govt, change in productivity

stagflation

when there is a negative supply shock

Demand-pull inflation

(AD increases) demand pulls up prices. Consumers want goods and services so they bid up prices

Cost-push inflation

(SRAS decrease) higher production costs increase prices. A negative supply shock increases the cost of production and forces producers to increase prices

in short run(wages and resource prices)

sticky. Will not change when PL changes

if consumer spending increases in the LR

wages and costs increase. PL increases and output stays the same

If consumer spending decreases in the LR

wages and costs eventually decrease