ap macro unit 3

aggregate demand

aggregate demand

demand for all finished goods and services at various price levels in a given period of time

aggregate demand =

C + I + G + (X-M)

wealth effect

when people increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls

interest rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

aggregate demand shifters

consumer spending, investment spending, government spending, net exports

short-run

the fact that producers have fixed and variable costs that limit their ability and flexibility to respond to market changes to maintain their profits

long-run

the time period in which all inputs can be varied

short-run aggregate supply (SRAS)

the total output of goods and services that exist in a period of time when production costs can be considered fixed

SRAS curve

shows the positive relationship between an economy's aggregate price level and the total quantity of final goods and services supplied by producers in the short run

profitability

price per unit sold - production cost/unit

fixed

cannot be changed for a long time

nominal wages

the dollar amounts paid to employees (fixed)

sticky wages

nominal wages are slow to rise or fall in response to changes in the economy

pricing power

a company's ability to raise the prices

SRAS curve shifters

1. resources

2. actions by the government

3. productivity

long-run aggregate supply (LRAS)

the time frame when price levels, wages, and contracts can adjust to changes in the economy

LRAS curve

shows the relationship between aggregate price level and the quantity of aggregate output that would exist if all costs, including nominal wages, were completely flexible

potential output

level of real GDP if all prices and wages were fully flexible and used efficiently

output gap

the difference between actual output and potential output

aggregate demand-aggregate supply model (AS/AD)

combines aggregate demand data with aggregate supply data

equilibrium

when market supply and demand are balanced and prices are stable

short-run macroeconomic equilibrium

the amount of aggregate output supplied by producers equals the aggregate demand

long-run macroeconomic equilibrium

when the short-run macroeconomic equilibrium is on the long-run aggregate supply curve

inflationary gap

when AD is greater than AS

recessionary gap

when an economy is operating below full employment

aggregate demand shock

an unforeseen event or occurrence that causes an increase or decrease in demand for goods and services

positive demand shock

increase in aggregate demand

negative demand shock

decrease in aggregate demand

supply shock

when something unforeseen quickly and dramatically changes product supply levels

positive supply shock

increase in aggregate supply

negative supply shock

decrease in aggregate supply

stagflation

a period of falling output and rising prices

inflation

measures the rate at which aggregate price levels rise

demand-pull inflation

when aggregate prices rise in response to a supply shock

economic growth

confident consumers spend more money

export surge

if export value increases, more money will enter the domestic economy

government spending

more federal spending on big projects = more goods and services demanded

cost-push inflation

a supply issue that results in higher prices

fiscal policy

the changes in spending and taxes governments make to affect overall spending

mandatory spending/transfers

must be paid for with no goods or services in return (social insurance, entitlements)

discretionary spending

results from legislation or policies that are not mandatory

expansionary fiscal policy

employed in recessions when potential output is not being met in order to increase aggregate demand

contractionary fiscal policy

employed in inflationary gaps to decrease aggregate demand

autonomous consumption

consumers will always spend a certain amount no matter what

dissaving

spending more than one brings in

discretionary fiscal policy

congress creates a new bill that is designed to change AD through government spending/taxation

non-discretionary fiscal policy

permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

automatic stabilizers

fiscal policies that help moderate fluctuations in an economy and occur without special government action

progressive taxation systems

increases percentage of tax paid as income increases

unemployment insurance

gives newly unemployed workers some money so they can get by until they find a new job

government transfers

payments to individuals with no goods/services in return

multiplier effect

shows how spending is magnified in the economy

marginal propensity to consume (MPC)

the increase in consumer spending when disposable income rise

marginal propensity to save (MPS)

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

spending multiplier =

1/MPS or 1/1-MPC

tax multiplier =

-MPC/MPS or -MPC/(1-MPC)