AP MACROECONOMICS UNIT 3 TERMS

Aggregate Demand (AD)

The total quantity of goods and services demanded across all levels of an economy at different price levels, represented by the AD curve.

Aggregate Supply (AS)

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

Short-Run Aggregate Supply (SRAS)

The AS curve that shows the relationship between the price level and the quantity of goods and services supplied in the short run, where input prices (like wages) are sticky.

Long-Run Aggregate Supply (LRAS)

The AS curve in the long run when input prices fully adjust to changes in the economy, reflecting the economy’s maximum sustainable output.

Potential Output (Full Employment Output)

The level of real GDP that an economy can produce when operating at full employment, without inflationary or recessionary pressures.

Recessionary Gap

A situation where actual output (real GDP) is below potential output, indicating high unemployment and underutilized resources.

Inflationary Gap

A situation where actual output (real GDP) exceeds potential output, leading to demand-pull inflation.

Short-Run Equilibrium

The point where aggregate demand intersects short-run aggregate supply, determining the current output and price level.

Long-Run Equilibrium

The point where AD, SRAS, and LRAS intersect, meaning the economy is at full employment with stable inflation.

Phillips Curve

A graphical representation of the inverse relationship between inflation and unemployment in the short run.

Fiscal Policy

Government actions involving changes in taxation and government spending to influence aggregate demand and stabilize the economy.

Monetary Policy

The Federal Reserve’s use of interest rates, the money supply, and banking regulations to influence economic activity.

Multiplier Effect

The process by which an initial change in spending leads to a larger overall change in real GDP due to the cyclical re-spending of income.

Marginal Propensity to Consume (MPC)

The proportion of additional income that a consumer spends rather than saves.

Marginal Propensity to Save (MPS)

The proportion of additional income that a consumer saves rather than spends.

AD-AS Model

A macroeconomic model that illustrates the relationship between aggregate demand, aggregate supply, and economic equilibrium.

Supply-Side Economics (Say’s Law)

The idea that "supply creates its own demand," suggesting that production drives economic growth rather than demand.

Keynesian Economics

A macroeconomic theory that emphasizes the role of aggregate demand and government intervention to stabilize economic fluctuations.

Inflation

The rate at which the general price level of goods and services rises, reducing purchasing power.

Deflation

A decline in the general price level of goods and services, often leading to reduced economic activity.

Stagflation

A situation characterized by stagnant economic growth, high unemployment, and high inflation.

LRAS Curve

The vertical curve in the AD-AS model representing long-run aggregate supply, indicating the economy’s full employment output.

Shifts in Aggregate Demand (AD)

Changes in consumer spending, investment, government spending, or net exports that shift the AD curve left or right.

Shifts in Aggregate Supply (AS)

Changes in resource prices, productivity, or government policies that shift the AS curve left or right.

Investment (I)

Business spending on capital goods like machinery, buildings, and technology to increase future production.

Consumption (C)

Household spending on goods and services.

Government Spending (G)

Public sector expenditures on goods and services, including infrastructure, defense, and education.

Net Exports (NX)

The value of a country’s exports minus its imports.

Equilibrium Price Level

The price level at which aggregate demand equals aggregate supply.

Equilibrium Output

The level of real GDP where aggregate demand and aggregate supply intersect.

Real GDP

The total value of goods and services produced in an economy, adjusted for inflation.

Nominal GDP

The total value of goods and services produced in an economy, measured in current prices without adjusting for inflation.

Short-Run Macroeconomic Equilibrium

The point where AD and SRAS intersect, determining the economy’s short-term price level and output.

Long-Run Macroeconomic Equilibrium

The point where AD, SRAS, and LRAS intersect, meaning the economy is producing at its full employment level.

Full Employment

The level of employment where there is no cyclical unemployment, only frictional and structural unemployment remain.

Natural Rate of Unemployment

The unemployment rate that exists when the economy is at full employment, including frictional and structural unemployment.

Automatic Stabilizers

Government programs, like taxes and unemployment benefits, that help counteract economic fluctuations without new legislation.

Discretionary Fiscal Policy

Deliberate changes in government spending and taxation to influence the economy.

Business Cycle

The fluctuations in economic activity over time, characterized by periods of expansion, peak, contraction, and trough.