ap macro unit 3

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aggregate demand

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56 Terms

1

aggregate demand

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

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2

aggregate demand =

C + I + G + (X-M)

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3

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

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4

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).

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5

aggregate demand shifters

consumer spending, investment spending, government spending, net exports

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6

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

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7

long-run

the time period in which all inputs can be varied

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8

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

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9

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

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10

profitability

price per unit sold - production cost/unit

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11

fixed

cannot be changed for a long time

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12

nominal wages

the dollar amounts paid to employees (fixed)

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13

sticky wages

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

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14

pricing power

a company's ability to raise the prices

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15

SRAS curve shifters

  1. resources

  2. actions by the government

  3. productivity

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16

long-run aggregate supply (LRAS)

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

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17

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

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18

potential output

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

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19

output gap

the difference between actual output and potential output

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20

aggregate demand-aggregate supply model (AS/AD)

combines aggregate demand data with aggregate supply data

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21

equilibrium

when market supply and demand are balanced and prices are stable

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22

short-run macroeconomic equilibrium

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

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23

long-run macroeconomic equilibrium

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

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24

inflationary gap

when AD is greater than AS

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25

recessionary gap

when an economy is operating below full employment

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26

aggregate demand shock

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

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27

positive demand shock

increase in aggregate demand

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28

negative demand shock

decrease in aggregate demand

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29

supply shock

when something unforeseen quickly and dramatically changes product supply levels

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30

positive supply shock

increase in aggregate supply

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31

negative supply shock

decrease in aggregate supply

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32

stagflation

a period of falling output and rising prices

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33

inflation

measures the rate at which aggregate price levels rise

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34

demand-pull inflation

when aggregate prices rise in response to a supply shock

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35

economic growth

confident consumers spend more money

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36

export surge

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

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37

government spending

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

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38

cost-push inflation

a supply issue that results in higher prices

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39

fiscal policy

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

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40

mandatory spending/transfers

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

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41

discretionary spending

results from legislation or policies that are not mandatory

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42

expansionary fiscal policy

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

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43

contractionary fiscal policy

employed in inflationary gaps to decrease aggregate demand

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44

autonomous consumption

consumers will always spend a certain amount no matter what

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45

dissaving

spending more than one brings in

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46

discretionary fiscal policy

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

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47

non-discretionary fiscal policy

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

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48

automatic stabilizers

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

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49

progressive taxation systems

increases percentage of tax paid as income increases

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50

unemployment insurance

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

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51

government transfers

payments to individuals with no goods/services in return

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52

multiplier effect

shows how spending is magnified in the economy

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53

marginal propensity to consume (MPC)

the increase in consumer spending when disposable income rise

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54

marginal propensity to save (MPS)

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

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55

spending multiplier =

1/MPS or 1/1-MPC

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56

tax multiplier =

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

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