AP Macro Unit 3, Topic's; 3.1 & 3.2

SRAS

short-run aggregate supply

LRAS

Long run aggregate supply

AD

aggregate demand

aggregate

total

real gdp= _______ = ________ = _________

real gdp= aggregate output=aggregate spending=aggregate omcp,e

aggregate output

the economy's total production of goods and services for a given time period

aggregate spending

the total spending on domestically produced final goods and services in the economy (C, I , G, Xn)

aggregate income

wages + rent + income + profit

what does the horizontal axis measure on an AD/AS model?

it measures changes in aggregate output, that tells us what's happening in aggregate spending and income, and the unemployment rate

what is the aggregate price level a measure of

inflation, it is based on the gdp deflator, not an inflation rate

Aggregate Demand

the demand for all goods and services purchased in product markets

what does a downward slopping AD curve represet

the inverse relationship between aggregate price level and the quantity of aggregate output demanded

When the aggregate price level falls, the quantity of aggregate output demanded _______

rises

When aggregate price levels rise, the quantity of aggregate output demanded _______

falls

an increase in the price levels causes ____________________

movement up and to the left of an AD curve

a change in quantity demanded is....

a movement along a given demand curve and is only causes in a change in price

real wealth effect

a change in the price level causes the purchasing power of a given amount of wealth to change

when the price level rises, the purchasing power of a given amount of wealth __________

decreases

interest rate effect

occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand

interest rate

the price of money is that interest rate

exchange rate effect

a lower price level causes the real exchange rate to depreciate, which stimulates spending on net exports

what are the determinates of consumption

wealth, income, income tax, expectations

when consumers have more wealth consumption __________

increases

when income taxes decrease consumption __________

increases

When consumers expect the economic conditions to prove consumption ________

increases

there is a __________ relationship between AD and tax

inverse

________ relationship spending between gov. spending and AD

positive

exports and ad have a ________ relationship

positive

imports and ad have a ________ relationship

inverse

autonomous

independent

expenditure

the spending of something

autonomous spending

the spending, which is independent of income

Disposable Income (DI)

gross income- income tax

what can you do with disposable income

you can either save or consume

multiplier effect

an inital change in spending will see of a spending chain that is magnifiied in the economy

Marginal Propensity to Consume (MPC)

the fraction of extra income that households consume rather than save, exp: if MPC=0.8 and income rises to $100, C rises $80

what is the equation for mpc

change in consumption/change in income

what is the marginal propensity to save (MPS)

how much people save rather than consume when there is a change in come, also always expressed as a fraction

what is the equation for MPS

change in savings/change in income

is it always true that "mpc+mps=1"

yes

what are the equations for the spending multiplier

what is the equation for the total change in GDP

multiplier x initial change in spending

as output falls, unemployment __________

rises

if the price level increases inflation, then real gdp demanded _______

falls

if the price level decreases (delfation), then real gdp demanded _______

increase

what doesn't shift the AD curve

changes in price shifts only QD, changes in price level causes a slide against the curve

an increase in spending shifts AD ______

right

a decrease in spending shifts AD _____

left

shifters of aggregate demand: change in consumer spending

increase/decrease of disposable income, consumer expectations (if ppl fear a recession they will spend less), taxes (decrease in income taxes causes people to spend more)

shifters of aggregate demand: changes in investment spending

real interest rate (price of borrowing money), expectations, productivity and tech, business taxes

shifters of aggregate demand: changes in gov spending

gov expenditures (decrease in detense? spending) (increase in public work programs)

shifters of aggregate demand: changes in net exports

exchange rates (if the us dollar appreciates relative to the euro), national income compares to abroad

AD=.....

AD=GDP=C+i+G+Xn