Unit 3: National Income and Price Determination

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Macroeconomic equilibrium

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55 Terms

1

Macroeconomic equilibrium

________- Occurs when the quantity of real output demanded is equal to the quantity of real output supplied.

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2

Marginal propensity

________ to consume (MPC)- How much people consume rather than save when there is a change in income.

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3

Supply shocks

________- An economy- wide phenomenon that affects the costs of firms and the position of the SRAS curve, either positively or negatively.

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4

price level

If the ________ for output rises faster than the rising costs, producers have a profit incentive to increase production.

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5

Technology

________ and productivity- Better ________ raises the productivity of both capital and labor.

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6

Multiplier effect

________- The idea that an initial change in spending will set off a spending chain that is magnified in the economy.

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7

Foreign sector

________ substitution effect- Goods and services produced in other nations.

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8

Recessionary gap

________- The amount by which full- employment GDP exceeds equilibrium GDP.

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9

GDP

In other words, it measures how ________ increases or decreases when the government increases or decreases spending in the economy.

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10

Exchange rates

________- Imports decrease when the ________ between the dollar and foreign currency falls.

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11

Deregulation

________- When the regulation of industries restricts their ability to produce, the short- run AS likely increases.

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12

Lags

________ and delays can sometimes occur with the discretionary fiscal policy.

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13

Political

________ or environmental phenomena- For a nation as large as the United States, wars and natural disasters can decrease the short- run AS without permanently decreasing the level of full employment.

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14

Equilibrium

________ can exist at, above, or below full employment.

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15

Fiscal policy

________- Deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level.

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16

real GDP

If taxes are lowered, the multiplier is smaller so to have the same increase in ________, the amount of taxes cut has to be larger than an increase in government spending.

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17

Contractionary fiscal policy

________- When the economy operates beyond full employement, inflation becomes a problem, so the government might need to contract the economy.

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18

general sources

Demand in the macroeconomy comes from four ________, which are used to calculate the real GDP.

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19

effects of negative supply shocks

It is typically used to counter the ________ or recessions.

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20

Negative supply shocks

________ usually occur when economy- wide input prices suddenly increase.

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21

Non discretionary fiscal policy

________ refers to permanent spending or taxation laws already on books that help regulate the economy.

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22

expansionary fiscal policy

To resume, ________ is the increases in government spending or lower net taxes meant to shift AD to the right.

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23

Positive supply shocks

________ might be the result of higher productivity or lower energy prices.

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24

positive relationship

The ________ between the level of domestic output produced and the aggregate price level of that output.

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25

AD curve

When the ________ increases, an inflationary gap happens to cause an increase in real GDP to GDPi (lower unemployment rate) and an increase in the aggregate price level to PL2.

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26

Interest rate

________ effect- Goods and services in the future.

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27

input prices

In the macroeconomic long run, the ________ have enough time to fully adjust to market forces.

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28

Income taxes

________ and anti- poverty programs are examples of automatic stabilizers during an economic boom or recession.

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29

Net Exports

________ (X- M)- When sales to foreign consumers are high and purchases from foreign producers are low, the ________ increase.

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30

sum of consumption

AD measures the ________ spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)

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31

Consumers

________ also increase their consumption if they are optimistic about the future.

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32

Inflationary gap

________- The amount by which equilibrium GDP exceeds full employment GDP.

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33

Wealth effect

________- Money and financial assets.

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34

Aggregate demand

________ (AD)- The inverse relationship between all spending on domestic output and the aggregate price level of that output.

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35

Marginal propensity

________ to save (MPS)- How much people save rather than consume when there is a change in income.

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36

Fiscal policy

________ is typically designed to manipulate AD to "fix "the economy.

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37

Expansionary fiscal policy

________- Real GDP is low and unemploymentis high when the economy suffers a recession.

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38

Marginal Propensity

________ to Save (MPS) is calculated by dividing the change in savings by dividing the change in disposable income.

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39

Marginal Propensity

________ to Consume (MPC) is calculated by dividing the change in consumption by dividing the change in disposable income.

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40

Aggregate demand (AD)

The inverse relationship between all spending on domestic output and the aggregate price level of that output

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41

Foreign sector substitution effect

Goods and services produced in other nations

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42

Consumer Spending (C)

If you put more money in the pockets of households, it is expected that they consume a great deal of it and save the rest

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43

Investment Spending (I)

Firms increase investment if they believe the investment will be profitable

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44

Government Spending (G)

The government injects money into the economy by spending more on goods and services, by reducing taxes, or by increasing transfer payments

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45

Foreign incomes

Exports increase with strong foreign economies

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46

Consumer tastes

If American blue jeans become more popular in France, American AD increases

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47

Exchange rates

Imports decrease when the exchange rate between the dollar and foreign currency falls

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48

Tax policy

Some taxes are aimed at producers rather than consumers

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49

Macroeconomic equilibrium

Occurs when the quantity of real output demanded is equal to the quantity of real output supplied

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50

Recessionary gap

The amount by which full-employment GDP exceeds equilibrium GDP

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51

Inflationary gap

The amount by which equilibrium GDP exceeds full employment GDP

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52

Fiscal policy

Deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level

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53

Expansionary fiscal policy

Real GDP is low and unemploymentis high when the economy suffers a recession

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54

Contractionary fiscal policy

When the economy operates beyond full employement, inflation becomes a problem, so the government might need to contract the economy

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55

Sticky prices

If price levels do not change, especially downward, with changes in AD, then prices are thought of as sticky or inflexible

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