Macro Unit 3 - Aggregate Supply & Demand

aggregate demand

total demand for final goods/services

aggregate supply

total supply for final goods/services

price level

reflects the current price changes without adjusting for inflation

real GDP

measure of an economy’s output with inflation adjusted

sticky/inflexible prices

wage set by a contract, can change, stable in the SR

flexible output prices

price of plane tickets can change rapidly, quickly change in SR too

menu cost

the cost of changing prices

money illusion

people misinterpreting nominal values and real values

supply shock

can be positive or negative, an event that affects AS

classical economic theory

let it run, self adjustment will occur

keynesian economic policy

gov can make a difference, gov should be involved

transfer payment

payments made to groups, nothing expected in return

government outlays

gov spending and transfer payments

mandatory outlays

determined gov spending, cannot change how much is allocated

discretionary outlays

spending that can be altered with federal budget

discretionary fiscal policy

Congress passes new laws that change AD with new spending or taxation

non discretionary fiscal policy

permanent spending/taxation to counter economic cycles and stabilize the economy

expansionary fiscal policy

laws to increase output and gov spending, decrease taxes

contractionary fiscal policy

laws to decrease inflation/price level and gov spending, increase taxes

time lags

takes time to pass/recognize change

deficit spending

increase spending without increasing taxes leads to annual deficit

crowding out

gov spending may cause effects that weaken policy effects

marginal propensity to consume

proportion of additional income spent on consumption

spending multiplier

determines the equation’s effect on spending from an initial change of a given amount

automatic stabilizers

gov programs that automatically implement countercyclical fiscal policy in response to economic conditions

laffer curve

illustration of the relationship between tax rates and revenue

loanable funds market

market where savers supply funds for loaners/borrowers