AP Macroeconomics Unit 3 Vocab

Actual investment spending

The total amount of investment actually undertaken in an economy, including both planned investment and unplanned changes in inventories.

Aggregate demand

The total quantity of goods and services demanded across all levels of an economy at a given overall price level and in a given period.

Aggregate supply

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

Automatic stabilizers

Government programs that automatically increase or decrease spending or taxes in response to economic changes, helping stabilize GDP without new legislation.

Balanced-budget multiplier

The effect on aggregate demand of an equal change in government spending and taxes, typically resulting in a change in GDP equal to the amount of spending.

Budget deficit

A situation in which government spending exceeds government revenue in a given period.

Budget surplus

A situation in which government revenue exceeds government spending in a given period.

Consumption function

A relationship showing how household consumption changes with disposable income.

Contractionary fiscal policy

Government policy involving decreased spending or increased taxes to reduce inflation or slow an overheating economy.

Cost-push inflation

Inflation caused by an increase in the cost of production, such as wages or raw materials, shifting aggregate supply leftward.

Crowding out effect

The reduction in private investment due to increased government borrowing, which raises interest rates.

Demand shock

An unexpected event that shifts aggregate demand, either positively or negatively.

Demand-pull inflation

Inflation resulting from an increase in aggregate demand, causing prices to rise.

Discretionary fiscal policy

Deliberate changes in government spending or taxation to influence economic activity.

Equilibrium

The point where aggregate demand equals aggregate supply, resulting in stable prices and output.

Expansionary fiscal policy

Government policy involving increased spending or decreased taxes to stimulate economic growth.

Fiscal policy

Government decisions about taxation and spending used to influence the economy.

Inflationary gap

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

Loanable funds market

A conceptual market where savers supply funds and borrowers demand funds, determining the equilibrium interest rate.

Long run aggregate supply

The level of output an economy can produce when all inputs are fully adjusted, independent of price level.

Long run

A period in which all factors of production can be varied, allowing full adjustment to economic changes.

Marginal propensity to consume

The fraction of additional income that households consume rather than save.

Marginal propensity to save

The fraction of additional income that households save rather than consume.

Output gap

The difference between actual GDP and potential GDP.

Planned investment spending

The amount of investment that firms intend to undertake during a given period.

Potential output/GDP

The level of output an economy can produce when resources are fully employed without causing inflation.

Recessionary gap

The amount by which actual GDP falls short of potential GDP, indicating underused resources.

Self-correcting

The economy's natural tendency to return to full employment without government intervention.

Short run aggregate supply

The total output producers are willing to supply at different price levels when some input prices are fixed.

Short run

A period in which at least one factor of production is fixed.

Social insurance

Government programs that provide protection against economic risks, such as unemployment or disability.

Spending multiplier

The ratio of change in GDP to the initial change in spending that caused it.

Stabilization policy

Government efforts to reduce the severity of economic fluctuations.

Stagflation

A combination of stagnant economic growth, high unemployment, and high inflation.

Sticky wages

Wages that are slow to adjust to changes in economic conditions, contributing to short-run aggregate supply rigidity.

Supply shock

An unexpected event that shifts aggregate supply, either positively or negatively.

Tax multiplier (transfer multiplier)

The ratio of change in GDP to an initial change in taxes or transfers.

Aggregate Demand and Supply

Graphical representation of total demand and total supply in the economy, showing equilibrium price level and output.