AP Econ Unit 3 National Income and Price Determination (AD/AS Graph)

stagnant, high, high, falling output, rising prices, left, SRAS

Stagflation: ________ economic growth

• ____ unemployment

• ____ inflation

• ____ ____ and ____ _____

• caused by a ___ shift to ____

widespread decline, increase, decrease, decrease

Recession: a period of significant, _______ _______ in economic actvity

• _______ in unemployment

• _______ in consumer spending

• _______ in investment

prolonged, decrease, increase

Depression: severe, _____ recession

• Significant _______ in Real GDP

• ______ in unemployment

sticky wages, short run, nominal, stay, upward sloping

______/prices is the theory that in the ____ ___, _______ wages ____ the same )they are slw to adjust. It is the reason that the SRAS line is ______ ______

maximum sustainable, real GDP, full employment, NRU, potential output, long run real GDP, LRAS

The Natural Rate of Output is the ______ ________ level of ____ ___ an economy can produce when operating at ____ _________

• also called full employment output (unemployment = ___), ______ ______, or ___-___ ___ ___

• The ____ line on the graph

change in spending, larger, GDP, spent multiple times, saves

The multiplier effect is the idea that any _____ __ ______ will have a much ______impact on ___ because each dollar is ____ _______ _____

• it is based on how much people spend versus how much they save where the amount a person ____ is the limiting factor

unexpected event, increases or decreases, price level and production, SRAS, positive, increase, right, decrease, increase, negative, decrease, left, stagflation, increase, decrease, recession

A supply shock is an _______ _____ that suddenly ______ __ _______ supply

• it causes a change in ____ _____ ___ ________ because it shifts ____

• An Expansionary (or _______) Supply shock is a sudden _____ in supply, SRAS shifts _____, causes price level to _____and output to _____

• A Contractionary (or _____) Supply shock is a sudden ____ in supply, SRAS shifts _____ causes ________, price level to _____ and output to _____. Also causes a ______

Fiscal policy, stabalize, government spending, taxes, aggregate demand

_____ ______: actions Congress takes to _____ the economy

• they do so by changing ______ ______ or _____

• this shifts the _______ _______ curve

new, aggregate demand, government spending, taxes

Discretionary Fiscal Policy is when congress creates a ___ bill designed to change _____ _____

• does so by changing _______ ______ or ______

• they actively change something at their discretion

automatic stabalizers, permanent, counter cyclically

Non Discretionary Fiscal Policy (________ _______): ______spending/taxation laws enacted to work _____ _______ to stabalize the economy

• Ex: wellfare and unemployment benefits

improve productivity, spending, aggregate demand, recession, expand

Expansionary Fiscal policy: aimed to ______ _______ by increasing ______ and therefore ______ ______ to alleviate a _____ and _____ an economy

slow down productivity, reducing inflation, aggregate demand, increasing, government spending

Contractionary Fiscal Policy: aim is to ___ ____ _______, means of _____ _______ by decreasing _______ ________

• done so by _______ taxes or decreasing _____ ______, or changing tariffs

Direct

What is the relationship between GDP and AD

inversely related

What is the relationship between GDP and unemployment

at

If the economy is at full employment, LRAS is __ output equilibrium

right

If the economy is in an recessionary gap, LRAS is to the _____ of the output equilibrium

left

In an inflationary gap, LRAS is ___ of the output equilibrium

potential output, full employment output, NRU, sustained increase in investment, capital stock

Shifters of the LRAS curve:

• Changes to ______ ______, ____ _________ ______, ___

• ______ ______ __ ________

• _____ ____

consume, change in consumption over change in disposable income

MPC (Marginal Propensity to ______)

• MPC=

• for every additional dollar earned, how much is spent

save, change in savings over change in disposable income

MPS (Marginal Propensity to ____)

• MPS=

• for every additional dollar earned, how much is saved

1/MPS or 1/(1-MPC)

Spending Multiplier=

• the larger MPC or smaller MPS, the larger the multiplier

change in spending times the spending multiplier or change in taxes times the tax multiplier

Two formulas to find Change in GDP, income, or aggregate demand

-MPC/MPS, positive, negative

Tax Multiplier=

• always smaller than the spending multiplier

• _______ if there is a tax cut

• _______ if there is a tax increase

less, saved, more

any change in taxes will be ___ impactful than an equal change in spending because a portion of taxes are ____. This makes changing spending ___ effective than tax cuts

1

MPC+MPS=

AD, right, increase, increase, decrease

If there is an increase in spending (consumer, business, government:

• __ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

AD, left, decrease, decrease, increase

If there is an decrease in spending (consumer, business, government:

• __ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

AD, left, decrease, decrease, increase

If there is a decrease in exports or increase in imports

• __ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

AD, right, increase, increase, decrease

If there is a decrease in imports or increase in exports

• __ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

SRAS, right, increase, decrease, decrease

If there is an improvemnt to quality or quantity of labor

• ____ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

SRAS, left, decrease, increase, increase

If the cost or natural resources or capital increase

• ___ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

SRAS, left, decrease, increase, increase

If the price level is expected to rise

• ____ shifts ___

• Real GDP ______

• Price level ______

• Unemployment _______

labor (quality or quantity), capital (human or physical, natural resources, technology, expected price level

Shifters of Aggregate Supply:

consumer spending, business spending, government spending, net exports

Shifters of Aggregate Demand:

overall demand for all goods and services from a country, overall spending

what is aggregate demand?

overall supply for all goods and services from a country, overall ability to produce

what is aggregate supply?

a period of time in which at least one input cost is fixed, usually wages

What is Short Run?

flexible, full employment, amount

In the long run:

• all prices and wages are ______

• economy in the long run always returns to ____ ______

• the ____ of resources affects production, not price

In the long run firms will increase wages causing them to layoff workers decreasing their ability to produce (SRAS) returning the economy to long run equilibrium.

If a question asks what happens to the economy or SRAS in the Long Run we assume or are told there is no government intervention, the eonomy is self correcting, and wages are flexible.

• In an inflationary period:

• will cause the economy to contract

In the long run firms will decrease wages allowing them to hire workers increasing their ability to produce (SRAS) returning the economy to long run equilibrium

If a question asks what happens to the economy or SRAS in the Long Run we assume or are told there is no government intervention, the eonomy is self correcting, and wages are flexible.

• In an recessionary period:

• will cause the economy to expand