Ap Macro Unit 3

Aggregate Demand

An economic measurement of the total sum of all goods and services produced in an economy

The Wealth Effect

Consumer wealth responds inversely to changes in price (Higher interest rates - wealth of consumers decreases)

Interest Rate Effect

The impact of changing interest rates on consumer spending and investment, where lower rates typically encourage borrowing and spending, while higher rates tend to dampen economic activity.

Foreign Trade Effect

As prices rise domestically, exported goods and services become more expensive and foreign consumers buy less

Shifters of Aggregate Demand

1. Consumer spending

2. Investment spending

3. government spending

4. next exports and imports

The Multiplier Effect

when a change in spending leads to a much larger change in real GDP than the initial change

Marginal Propensity to consume (MPC)

How much of an income increase a consumer spends as opposed to saves

Marginal Propensity to save (MPS)

The proportion of a raise in pay that a consumer saves, instead of spends

Spending Multiplier

1/1-mpc

Calculating Total Change in GDP (Spending)

gdp = c + g + I + xn

Tax multiplier (also to transfer payments)

Calculating total change in GDP (Taxes)