Untitled Flashcards Set

Wealth

The value of a household’s accumulated savings.

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.

Real Wealth Effect

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

Interest Rate Effect

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

Exchange Rate Effect

The change in net exports caused by a change in the value of the domestic currency, which leads to a change in the relative price of domestic and foreign goods and services.

Marginal Propensity to Consume (MPC)

The increase in consumer spending when disposable income rises by $1.

Marginal Propensity to Save (MPS)

The increase in household savings when disposable income rises by $1.

Expenditure 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.

Short-Run Aggregate Supply Curve

Shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short-run.

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.

Full-Employment Output

The level of real GDP the economy can produce if all resources are fully employed.

Short-Run Macroeconomic Equilibrium

Occurs where the quantity of aggregate output supplied is equal to the quantity of aggregate output demanded, at the intersection of the AD and SRAS curves.

Long-Run Macroeconomic Equilibrium

Occurs when a short-run macroeconomic equilibrium is at the full employment level of output, aligning with the LRAS curve.

Output Gap

The difference between actual output and full employment output.

Demand Shock

An event that shifts the aggregate demand curve.

Supply Shock

An event that shifts the short-run aggregate supply curve.

Stagflation

The combination of inflation and stagnating (or decreasing) aggregate output.

Long-Run Self Adjustment

The process that brings the economy back to equilibrium after a supply or demand shock, without government policy response.

Fiscal Policy

The use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy.

Expansionary Fiscal Policy

Increases aggregate demand to close a recessionary gap through increased government spending or decreased taxes.

Contractionary Fiscal Policy

Decreases aggregate demand to close an inflationary gap through decreased government spending or increased taxes.

Discretionary Fiscal Policy

Fiscal policy resulting from deliberate actions by policymakers rather than established rules.

Automatic Stabilizers

Government rules that cause fiscal policy to automatically be expansionary during economic contractions and contractionary during expansions.