Unit 3 - National Income and Price Determination

Marginal Propensity to Consume

the increase in consumer spending when disposable income rises by $1

Marginal Propensity to Save

the increase in household savings when disposable income rises by $1

Autonomous Change in Aggregate Spending

an initial rise or fall in aggregate spending that is the cause, not the result of a series of income and spending changes

Multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change

Consumption Function

an equation showing how an individual household’s consumer spending varies with the household’s current disposable income

Autonomous Consumer Spending

the amount of money a household would spend if it had no disposable income

Aggregate Consumption Function

the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

Planned Investment Spending

the investment spending that businesses intend to undertake during a given period

Inventories

stocks of goods held to satisfy future sales

Inventory Investment

the value of the change in total inventories held in the economy during a given period

Unplanned Inventory Investment

occurs when actual sales are less than business expected, leading to unplanned increases in inventories

Actual Investment Spending

the sum of planned investment spending and unplanned inventory investment

Aggregate Demand Curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, business, the government, and the rest of the world

Wealth Effect of a Change in the Aggregate Price Level

the change in consumer spending caused by the altered purchasing power of consumers’ assets

Interest Rate Effect of a Change in the Aggregate Price Level

change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money

Fiscal Policy

the use of taxes, government transfers, or government purchases of goods and services to stabilize the economy

Monetary Policy

the central bank’s use of changes in the quantity of money or the interest rate to stabilize the economy

Aggregate Supply Curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

Nominal Wage

the dollar amount of the wage paid

Sticky Wages

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

Short-run Aggregate Supply Curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

Long-run Aggregate Supply Curve

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

Potential Output

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

AD-AS Model

the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations

Short-run Macroeconomic Equilibrium

when the quantity of aggregate output supplied is equal to the quantity demanded

Short-run Equilibrium Aggregate Price Level

the aggregate price level in the short-run macroeconomic equilibrium

Short-run Equilibrium Aggregate Output

the quantity of aggregate output produced in the short-run macroeconomic equilibrium

Demand shock

an event that shifts the aggregate demand curve is a demand shock

Supply shock

an event that shifts the short-run aggregate supply curve

Stagflation

the combination of inflation and stagnating aggregate output

Long-run Macroeconomic Equilibrium

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

Recessionary Gap

when aggregate output is below potential output

Inflationary Gap

when aggregate output is above potential output

Output Gap

the percentage difference between actual aggregate output and potential output

Self-Correcting

describes the economy when shocks to aggregate demand affect aggregate output in the short run, but not the long run

Stabilization Policy

the use of government policy to reduce the severity of recessions and rein in excessively strong expansions

Social Insurance

government programs intended to protect families against economic hardship

Expansionary Fiscal Policy

increases aggregate demand

Contractionary Fiscal Policy

reduces aggregate demand

Lump-sum Taxes

taxes that don’t depend on the taxpayer’s income

Automatic Stabilizers

government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands

Discretionary Fiscal Policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules