AP Econ Unit 3 Vocab

Marginal Propensity to Consume (MPC)

The increase in consumer spending when income rises by $1. Because consumers normally spend part but not all of an additional dollar of disposable income, this value is between 0 and 1.

Marginal Propensity to Save (MPS)

The increase in household savings when disposable income rises by $1. Because consumers normally save part but not all of an additional dollar of disposable income, this value is between 0 and 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 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 firms intend to undertake during a given period. This may differ from actual investment spending due to unplanned inventory investment.

Inventories

Stocks of goods and raw materials held to satisfy future sales

Inventory Investment

The value of the change in total inventories held in the economy during a given period. Unlike other types of investment spending, this can be negative if inventories fall.

Unplanned Inventory Investment

Unplanned changes in inventories, which occurs when actual sales are more or less than businesses expected; sales in excess of expectations result in negative unplanned inventory investment

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, businesses, the government, and the rest of the world

Wealth Effect of a Change in the Aggregate Price Level

The effect on consumer spending caused by the change in purchasing power of consumers’ assets when the aggregate price level changes. A rise in the aggregate price level decreases the purchasing power of consumers’ assets, so they decrease their consumption; a fall in the aggregate price level increases the purchasing power of consumers’ assets, so they increase their consumption.

Interest Rate Effect of a Change in the Aggregate Price Level

The effect on consumer spending and investment spending caused by a change in the purchasing power of consumers’ money holdings when the aggregate price level changes. A rise/fall in the aggregate price level decreases/increases the purchasing power of consumers’ money holdings. In response, consumers try to increase/decrease their money holdings, which drives up/down interest rates, thereby decreasing/increasing consumption and investment.

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

A graphical representation that shows the relationship between the aggregate price level and the total quantity of aggregate output supplied

Nominal Wages

The dollar amount of any given 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

A graphical representation of 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. The curve has a positive slope because a rise in the aggregate price level leads to a rise in profits, and therefore output, when production costs are fixed.

Long-Run Aggregate Supply Curve

A graphical representation of the relationship between the aggregate price level and the quantity of aggregate output supplied if all prices, including nominal wages, were fully flexible. The curve is vertical because the aggregate price level has no effect on aggregate output in the long run; in the long run, aggregate output is determined by the economy's potential output.

Potential Output

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

AD-AS Model

The basic module used to understand fluctuations in aggregate output and the aggregate price level. It uses the aggregate demand curve and the aggregate supply curve together to analyze the behavior of the economy in response to shocks or government policy.

Short-Run Macroeconomic Equilibrium

The point at which the quantity of aggregate output supplied is equal to the quantity demanded

Short-Run Equilibrium Aggregate Price Level

The aggregate price level in short-run macroeconomic equilibrium

Short-Run Equilibrium Aggregate Output

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

Demand Shock

Any event that shifts the aggregate demand curve. A positive event  is associated with higher demand for aggregate output at any price level and shifts the curve to the right. A negative event is associated with lower demand for aggregate output at any price level and shifts the curve to the left.

Supply Shock

An event that shifts the short-run aggregate supply curve. A negative event raises production costs and reduces the quantity supplied at any aggregate price level, shifting the curve leftward. A positive event decreases production costs and increases the quantity supplied at any aggregate price level, shifting the curve rightward.

Stagflation

The combination of inflation and falling aggregate output

Long-Run Macroeconomic Equilibrium

A situation in which the short-run macroeconomic equilibrium is also on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output.

Recessionary Gap

Exists when aggregate output is below potential output

Inflationary Gap

Exists when aggregate output is above potential output

Output Gap

The percentage difference between actual aggregate output and potential output

Self-Correcting

Refers to the fact that shocks to aggregate demand affect aggregate output in the short run, but not in the long run

Stabilization Policy

The use of government policy to reduce the severity of recessions and to rein in excessively strong expansions. There are two main tools: monetary policy and fiscal policy.

Social Insurance

Government programs—like Social Security, Medicare, unemployment insurance, and food stamps—intended to protect families against economic hardship

Expansionary Fiscal Policy

Fiscal policy that increases aggregate demand by increasing government purchases, decreasing taxes, or increasing transfers

Contractionary Fiscal Policy

Fiscal policy that reduces aggregate demand by decreasing government purchases, increasing taxes, or decreasing transfers

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. Taxes that depend on disposable income are the most important examples of this.

Discretionary Fiscal Policy

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